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ONTARIO 



LEGISLATIVE ASSEMBLY 



i 



1969 

REPORT 

ON 

CREDIT UNIONS 

BY 

SELECT COMMITTEE 

ON 

COMPANY LAW 



TABLED IN THE LEGISLATIVE ASSEMBLY BY 

GORDON R. CARTON, Q. C, M.P.P. 
CHAIRMAN 



2nd SESSION, 28th LEGISLATURE, 18 ELIZABETH II 



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ONTARIO 



LEGISLATIVE ASSEMBLY 



1969 1 3 4 3 i 

REPORT 



ON 



CREDIT UNIONS™**^ 

IORONTO • 4fe 






BY F NOV 151973 

*ecEiyfc2 

SELECT COMMITTEE 

ON 

COMPANY LAW 



TABLED IN THE LEGISLATIVE ASSEMBLY BY 

GORDON R. CARTON, Q. C, M.P.P. 
CHAIRMAN 



2nd SESSION, 28th LEGISLATURE, 18 ELIZABETH II 



")R i 



PROVINCE OF ONTARIO 

LEGISLATIVE ASSEMBLY 

SELECT COMMITTEE ON COMPANY LAW 

REPORT 

ON 

CREDIT UNIONS 

TABLE OF CONTENTS 

Page 

Terms of Reference i 

Introduction iii 

Chapter 1 The Nature and History of the Credit Union 1 

Chapter 2 Leagues and Centrals 4 

Chapter 3 The Legislation 8 

Chapter 4 Incorporation 11 

Chapter 5 Objects and Powers 16 

Chapter 6 By-laws 18 

Chapter 7 Shares 22 

Chapter 8 Membership Bond 24 

Chapter 9 Branches 37 

Chapter 10 Mergers 38 

Chapter 1 1 Membership — Minors 40 

Chapter 12 Membership — Corporations and Unincorporated 

Associations 43 

Chapter 13 Internal Administration — General 46 

Chapter 14 Internal Administration — Directors and Officers 48 

Chapter 15 Internal Administration — The Credit Committee 53 

Chapter 16 Internal Administration — The Supervisory Committee 57 

Chapter 17 Internal Administration — Standard Care of Directors 

and Members of the Credit 

and Supervisory Committees 64 

Chapter 1 8 Internal Administration — Voting Rights 66 

Chapter 1 9 Loans 67 



Page 

Chapter 20 Borrowing Powers 73 

Chapter 21 Term Deposits 75 

Chapter 22 Financial Stability — General 80 

Chapter 23 Financial Stability — The Guarantee or Reserve Fund . 81 

Chapter 24 Financial Stability — Liquidity 84 

Chapter 25 Financial Stability — Stabilization Fund 91 

Chapter 26 Financial Stability — Supervision 97 

Chapter 27 Financial Stability — Auditors 103 

Chapter 28 Miscellaneous Amendments 108 



APPENDICES 



A Partial list of persons and organizations who submitted 
written briefs, communications or suggestions. 



TERMS OF REFERENCE 

On Tuesday, July 23, 1968 in the Legislative Assembly of Ontario, the 
Honourable Mr. John P. Robarts (The Prime Minister) moved, and the 
Honourable C. S. MacNaughton (The Provincial Treasurer) seconded, a 
resolution, which read in part as follows: 

"That a select committee of this House be appointed to continue the 
enquiry and review of the law affecting the corporations in this province 
as reported on by the select committee of this House appointed on June 
22, 1965, and re-appointed on July 8, 1966, and in particular, to enquire 
into and review the law relating to mergers or amalgamations, the rights 
of dissenting shareholders in the event of various fundamental corporate 
changes, the purpose, function and scope of the annual return, the field 
of corporation finance, the law relating to the protection of the creditor, 
and the dissolution of the ordinary commercial corporation in Ontario. 

And further, to enquire into and report upon such specialized types of 
corporations as insurance companies, loan and trust companies, cor- 
porations without share capital, credit unions, finance and acceptance 
companies, co-operatives, and extra-provincial companies, together with 
the legislation of other jurisdictions relating to the same matters . . . 

And the said committee to consist of 13 members to be composed as 
follows : 

Mr. Carton (Chairman), Messrs. Braithwaite, De Monte, Henderson, 
Johnston (St. Catharines), Lawrence (Carleton East), Meen, Price, 
Reilly, Renwick (Riverdale), Rowe, Shulman and Sopha. 

Motion agreed to.'' 

On June 26, 1969, by order of the House, Mr. Trotter was substituted for 
Mr. Sopha in the membership of the Committee. 



TO: The Honourable F. M. Cass, Q.C., 

Speaker of the Legislative Assembly of the Province of Ontario : 



Sir: 



We, the undersigned members of the Committee appointed by the Leg- 
islative Assembly of the Province of Ontario on July 23, 1968 to enquire 
into and review, inter alia, the law relating to credit unions, together with 
legislation of other provinces relating thereto, have now the honour to 
submit the attached Report on credit unions. 



<= ^r^i 



Gordon R. Carton /£*<£., Chairman 



Dante M. DeMonte, O.C. 




Arthur K. Meen, Q.C 




Russell D. Rowe 
Elmer W. Sophc/, Q.C 





CV — eV\ 



Leonard A. Bralthwafte 




Lome C. Henderson 




The Hon. A.B.R. Dfwrence, Q.C 








/ James Renwlck, Q.C. 




INTRODUCTION 

The Committee was reconstituted on July 23, 1968 with revised terms 
of reference, which appear above, covering a range of specialized corpora- 
tions and certain aspects of the business corporation not reported on in 
the first Interim Report of the Select Committee. 

In view of the breadth of the terms of reference and in particular the 
time involved in reviewing the law relating to the number and variety of 
specialized corporations included for consideration by this Committee, it 
was decided from the outset to examine and report upon each major topic 
separately. 

The first such topic selected for consideration by the Committee was the 
law relating to credit unions, which so far as can be established has not 
been the subject of a study by a Select Committee of the Legislature since 
the inception of the credit union movement. 

Submissions were invited from interested persons and a list of those 
received by the Committee appears at the end of this Report. Between 
January 28, 1969 and December 4, 1969, 19 meetings of the Committee 
were held. The Committee concluded that matters relating to the possible 
taxation of credit unions were outside its terms of reference and the deliber- 
ations and recommendations of this Committee were therefore made with- 
out reference to or discussion of the possibility or desirability of the inci- 
dence of taxation upon credit unions as would appear to be contemplated 
in the recent White Paper on Taxation. Although the recommendations in 
this Report are intended to be final recommendations, the Committee was 
compelled for reasons of time to limit its study to those areas of major 
concern respecting credit unions and consequently, there are certain aspects 
of the law regulating credit unions which are not dealt with in this Report. 

Should the recommendations of this Committee contained herein be 
accepted and implemented, the Committee envisages a radical reconstruc- 
tion and consolidation of the credit union movement in Ontario which will 
likely raise new questions concerning the organization and administration 
of credit unions. Rather than speculate as to what changes might be 
necessary or desirable in the future, the Committee has confined its recom- 
mendations to the present structure of the credit union movement and to 
facilitating its controlled expansion and consolidation which the Com- 
mittee considers basic to the continued prosperity of credit unions. In the 
view of this Committee, it is desirable that should the recommendations 

iii 



contained herein be implemented a further study of the credit union move- 
ment be conducted at some future date after the period of transition 
presently anticipated in order to consider further what proposals and 
adjustments in the law are desirable in order to preserve credit union 
traditions of member democracy and participation in credit unions with 
large memberships spread over wide areas and served by branch offices. 

As specifically provided for in its terms of reference, the Committee's 
study of credit unions included an examination of the relevant legislation 
of other provinces. Meetings were held with provincial authorities and 
representatives of the credit union movement in Manitoba, Saskatchewan 
and British Columbia and the Committee wishes to record its gratitude 
for the assistance of those who were kind enough to meet with the Com- 
mittee and also to the provincial authorities and representatives of the 
credit union movements of the other provinces from whom valuable 
information was obtained by correspondence. 

The Committee also wishes to express its gratitude to Dr. B. N. Arnason, 
formerly Deputy Minister of Co-operation and Co-operative Development, 
Saskatchewan, presently advising the government of Zambia on the estab- 
lishment of co-operatives in that country, to M. G. Marotte, Secretary- 
Treasurer of La Caisse Populaire Ste-Clair de Montreal and to M. Rosario 
Tremblay, Officer of Public Relations, La Federation de Quebec des Unions 
Regionales des Caisses Populaires Desjardins, for giving the Committee 
the benefit of their long experience with credit unions and caisses popu- 
laires respectively. 

Representatives of the Committee also met with a number of other per- 
sons connected with government and the credit union movement in Ontario 
and the members of the Committee wish to express their appreciation par- 
ticularly to Mr. W. M. JarTray, Director of the Registration and Examina- 
tion Branch of the Department of Financial and Commercial Affairs, 
Ontario, and to Mr. L. K. James, Supervisor of Credit Unions, Ontario, 
for their advice and continuous assistance to the Committee. In the almost 
total absence of analytical written material relating to credit unions their 
assistance was invaluable. A position paper prepared for the Committee 
by Professor C. H. McNairn of the University of Toronto, Faculty of 
Law, also greatly assisted the staff of this Committee in its research into 
credit unions. 

The Committee was fortunate to receive the benefit of the advice of Mr. 
John G. Arthur, F.C.A. of Peat, Marwick, Mitchell and Company in its 
consideration of the guarantee fund provisions. Mr. Arthur also reviewed 
for the Committee Chapter 23 of the Report. 

Although this Committee is indebted to a great number of persons and 
organizations, only some of whom are noted above, this Report would not 

iv 



have been possible had it not been for the ability, experience and deter- 
mined purpose of our Counsel, Mr. John W. Blain, Q.C. of the Toronto 
firm of McCarthy and McCarthy. Mr. Blain and our Research Director 
Mr. Saul Schwartz, were appointed to the Committee at the first meeting 
and have continued in these offices to date. Both have worked unceasingly 
in the preparation of this Report. 

The members of the Committee and the staff wish to express their 
appreciation to Mrs. Frances I. Nokes who so ably, over the whole of the 
period of the Committee's existence, has performed our innumerable sec- 
retarial duties and the management of the Committee's office. 

In the Report, for the purposes of ease of reference, the Ontario Credit 
Unions Act is referred to as "the Act" and provincial legislation of other 
provinces governing credit unions is cited by reference only to the particular 
province and not by way of full citation. The full citations of the relevant 
legislation appear below. 

Ontario 

The Credit Unions Act, R.S.O. 1960, c. 79 as amended, 1960-61, c. 16; 
1964, c. 64; 1966, c. 33; 1968-69, Bill 85, The Credit Unions Amendment 
Act, 1968-69, assented to May 7th, 1969; Bill 199, The Credit Unions 
Amendment Act, 1968-69 (No. 2), assented to October 31st, 1969. 

Alberta 

The Credit Union Act, R.S.A. 1955, c. 67; as amended, 1957, c. 13; 
1958, c. 13; 1959, c. 13; 1961, c. 19; 1965, c. 19; 1966, c. 23; 1968, c. 16. 

British Columbia 

Credit Unions Act, 1961, S.B.C. 1961, c. 14; as amended, 1963, c. 12; 
1964, c. 15; 1965, c. 8; 1967, c. 49; 1968, c. 13; 1969, c. 6. 

Manitoba 

The Credit Unions Act, R.S.M. 1954, c. 54; as amended, 1955, c. 12; 
1956, c. 11; 1957, c. 12; 1961 (First Session), c. 10; 1964 (First Session), 
c. 12; 1966, c. 14; 1966-67, c. 59; 1968, c. 15. 

New Brunswick 

Credit Unions Act, S.N.B. 1963 (Second Session), c. 2; as amended, 
1964, c. 24; 1966, c. 45; 1967, c. 32; 1968, c. 23; 1969, c. 28. 

Newfoundland 

The Co-operative Societies Act, R.S.N. 1952 c. 172; as amended, 1954, 
c. 42; 1963, c. 4; 1966, c. 23; 1966-67, c. 79. 



Nova Scotia 
Credit Union Act, R.S.N.S. 1967, c. 69; as amended, 1969, c. 36. 

Prince Edward Island 
The Credit Union Act, S.P.E.I. 1964, c. 7; as amended, 1968, c. 16. 

Quebec 

Savings and Credit Unions Act, R.S.Q. 1964, c. 293; as amended, 1967, 
c. 72; 1968, c. 76. 

Saskatchewan 

The Credit Union Act, R.S.S. 1965, c. 248; as amended, 1966, c. 29; 
1967, c. 51; 1968, c. 15; 1969, c. 12. 



VI 



CHAPTER I 
The Nature and History of the Credit Union 

1. Stated in its simplest terms, a credit union is a co-operative savings 
and loan institution organized on a local basis among a group of people 
for the encouragement of thrift and to provide for its members a ready 
source of credit at reasonable rates of interest. As a co-operative dealing 
exclusively in money, a credit union may only accept funds from and make 
loans to its members but, unlike other co-operative ventures which follow 
the general co-operative principle of open membership, membership in a 
credit union in Ontario is limited "to persons having a common bond of 
occupation or association or to persons within a well-defined neighbour- 
hood or community". 1 Members must be shareholders but shares in a 
credit union resemble more closely those in a co-operative rather than 
in a business corporation since each member has only one vote regardless 
of the number of shares held and credit union shares are withdrawable. 
Although under its by-laws a credit union may impose a notice provision 
before shares are withdrawn, this requirement is not generally enforced 
and for all practical purposes shares are withdrawable on demand. Loans 
may be made to members at a maximum interest rate of 1% per month 2 for 
"provident and productive purposes" 3 which has proved to be an elastic 
qualification. Credit unions can and do borrow from outside sources. 

2. The origins of the modern credit union movement in Canada can be 
traced to the people's bank movement in Europe during the nineteenth 
century which fostered the growth of local co-operative credit societies 
in many countries. 

3. The first co-operative credit society in Canada was a caisse populaire, 
established at Levis, Quebec in 1900 by Alphonse Desjardins. In creating 
the Quebec caisse populaire, Desjardins used as his model the variety of 
local co-operative credit societies which had been established with vary- 
ing degrees of success in several European countries, but also added several 
features which have become basic characteristics of both the caisse popu- 
laire and the credit union in Canada and the United States. The Quebec 
caisse populaire was in essence a savings institution and thrift, savings 
and restraint upon credit were emphasized to a greater degree than in the 
typical European people's bank which was primarily a lending institution. 
Apart from philosophical beliefs, a practical reason for encouraging mem- 
bers to save rather than borrow was the introduction by Desjardins of the 
principle of limited liability which made it more difficult to raise funds 
from outside the membership so that in the early caisse populaire, at least, 
the funds available for lending depended almost entirely upon the savings 
of the members. Desjardins also introduced a tripartite management 
structure with powers of administration divided among a board of direc- 

1 



tors, a credit committee and a supervisory committee which were separ- 
ately elected and constituted independent and autonomous bodies with 
separate and distinct functions. 

4. Desjardins was also influential in the early development of credit 
unions in the United States and assisted in obtaining credit union legis- 
lation in Massachusetts in 1909 and in New York in 1912. But the establish- 
ment of the credit union movement in the United States essentially took 
place in the 1920's under the promotional leadership of Edward I. Filene 
and Roy F. Bergengren during which time the United States credit union 
evolved and has remained as a different institution from the caisse popu- 
late of Quebec. The typical United States credit union retained the basic 
framework of the Desjardins caisse populaire but the credit union move- 
ment was predominantly urban and not rural as in Quebec. Members 
were usually linked by a social or occupational common bond, invented 
as an alternative to the geographical boundaries of the parish which limited 
the membership of a caisse populaire, in order to meet different social and 
economic conditions prevailing in the United States. Although the aims 
of the Quebec caisse populaire and the United States credit union were 
identical in that both sought as co-operative institutions to promote thrift 
and savings and to provide for the credit needs of members at reasonable 
rates of interest, the Quebec caisse populaire emphasized the savings aspect, 
whereas the United States credit union focussed more on the provision 
of credit. In both the caisse populaire and the credit union, loans were 
made only for "provident and productive purposes". According to the 
original policies of the caisse populaire, this completely excluded consumer 
loans but, as the United States credit union movement attached a broader 
interpretation, credit unions concentrated on providing personal consumer 
credit. 

5. While the Quebec caisse populaire was being modified to meet the 
different social and economic conditions in the United States, a separate 
but parallel development took place in the Maritimes in the establishment 
of the Antigonish credit union movement. In 1928, the university at Antigo- 
nish instituted a programme of co-operative education conducted in small 
communities through study groups organized by the university. The 
establishment of co-operatives was viewed as a means of increasing the 
prosperity of the people in that area and since credit unions are in essence 
co-operative savings and loan institutions, their establishment was also 
encouraged as part of the general promotion of co-operative organizations. 
The Antigonish movement combined the framework and some of the 
traditions of the Quebec caisse populaire with some of the modifications 
made by the United States credit union movement. The credit union move- 
ment in the Maritimes, which took place around 1933, was predominantly 
rural and organized in small fishing and farming communities. Although 
they were principally "savings" societies, their lending policies were more 



flexible than those of the caisse populaire. Loans for provident and pro- 
ductive purposes included business loans and loans to co-operatives as 
well as loans to individuals. Because the Antigonish credit union was devel- 
oped as part of a programme to promote co-operatives, the membership 
bond requirement, which included the common bond version developed 
in the United States, was more closely related to the basic co-operative 
precept of open membership based on similarity of needs rather than to 
the small localized membership of the typical Quebec caisse populaire. 
This early liberal interpretation of the membership bond probably had 
long term effects in the administrative attitudes towards community 
credit unions in the Maritimes. 

6. The Antigonish credit union movement spread to the western provinces 
in 1937-38 where credit unions were established in both rural and urban 
areas with both a geographical residential bond or the United States 
common bond of occupation or association. Although a number of credit 
unions were formed with an associational bond these were often in sub- 
stance community credit unions where the common bond of association 
was membership in a local co-operative society serving the community. 

7. In Ontario, prior to 1940, there were only about fifteen co-operative 
credit societies, mainly caisses populaires established in parishes in French 
speaking communities around Ottawa, with total assets of some $1,650,000. 
There was no existing credit union movement comparable with the 
Antigonish movement in the Maritimes and western provinces. The 
establishment of the credit union movement in Ontario basically took place 
from 1940 and was given its impetus by the United States National 
Association of Credit Unions (which was the forerunner of the present 
CUNA International, Inc.). In consequence, the credit union movement in 
Ontario is very similar to that in the United States. It is predominantly 
urban and composed of a large number of credit unions organized with a 
common bond of occupation and association with relatively few and small 
community credit unions. 4 



1. Section 8. 

2. Section 29(2). 

3. Section 4 (1) (b). 

4. For an informative account of the history and development of the credit union 
movement, see "Credit Unions and Caisses Populaires", a working paper, dated 
November 1962, prepared by Gilles Mercure for the Royal Commission on Banking 
and Finance. See also Jack Dublin, "Credit Unions, Theory and Practice" (1966), 
chapter IX. 



CHAPTER 2 
Leagues and Centrals 

1. A second tier in the credit union movement in Ontario is leagues of 
credit unions incorporated pursuant to Section 53 of the Act which reads 
as follows : 

"Ten or more credit unions may be incorporated as a league for the 
objects and purposes of, 

(a) protecting and advancing the credit unions that are members of the 
league ; 

(b) encouraging and assisting educational and advisory work relating 
to credit unions ; 

(c) arranging for group bonding of credit union employees and ensur- 
ing repayment of loans made by credit unions to their members; 

(d) receiving moneys from its members either as payment on shares or 
as deposits ; and 

(e) making loans to credit unions that are members of the league." 

Although there are presently four leagues incorporated under the Act, 
only three are active, the largest of which is The Ontario Credit Union 
League Limited with a membership, at December 31, 1968, of some 1434 
credit unions (for the purposes of this report The Ontario Credit Union 
League Limited will be referred to as "OCUL"). The remaining leagues 
serve the caisses populaires in Ontario and are much smaller and more 
limited in their services. La Caisse Regionale Nipissing et Sudbury Ltee. 
has 16 affiliated caisses populaires and La Federation des Caisses Popu- 
laires (C.F.) de L'Ontario Ltee. has 50 affiliated caisses populaires. La 
Caisse Regionale Cochrane et Temiskaming Ltee. is inactive and league 
services to its 16 affiliated caisses populaires are provided by La Federation 
des Caisses Populaires (C.F.) de L'Ontario Ltee. The Committee is advised 
that there is a proposal to transfer to La Federation the assets of the inac- 
tive Regionale which will thereupon surrender its charter. Most, but not all, 
credit unions belong to a credit union league. Of the 1,650 active credit 
unions in Ontario at December 31, 1968, 34 (including 3 caisses populaires) 
representing about $48,000,000 in assets had chosen not to join any league. 

2. The leagues, which are financed by annual dues, 1 provide a variety of 
services both financial and non-financial covering most aspects of the 
operations of a credit union and are sometimes referred to as credit unions 
for credit unions. They play a major role in facilitating the incorporation of 
new credit unions, preparing the necessary documents and negotiating with 
the Department on behalf of those seeking incorporation. The leagues also 



assist their members in obtaining by-law amendments. Because of their 
familiarity with the organization, procedure and law relating to credit 
unions, their views carry weight with the Department. OCUL belongs to 
Cuna International, Inc. (CUNA), an international association of credit 
union leagues, through which OCUL is able to arrange for its members the 
life insurance which is offered by nearly all credit unions on share accounts 
and on outstanding loan balances of their members, and bonding policies 
to cover credit union officers and employees. 

The leagues also provide educational programs to promote the credit 
union philosophy of co-operation and thrift and to instruct those members 
involved in the administration of the credit union in the techniques of 
credit union management. In OCUL, such services are provided on a highly 
organized basis through advisory committees available to deal with par- 
ticular problems of affiliated credit unions and formal courses for the 
training of credit union personnel. In the other two active leagues, the 
educational services are more informal and are oriented to meet the 
somewhat different philosophy of the caisse populaire movement. 

3. The basic internal organization of a league is identical with that of a 
local credit union. They are administered by a board of directors, a credit 
committee and a supervisory committee elected by and from the member- 
ship. OCUL has appointed a loan officer in lieu of the credit committee 
and an auditor to replace the supervisory committee. La Federation des 
Caisses Populaires (C.F.) de L'Ontario Ltee. has replaced its supervisory 
committee by an auditor but still retains the credit committee while La 
Caisse Regionale de Nipissing et Sudbury Ltee. operates with both a 
credit committee and a supervisory committee. 

4. Because of its size OCUL is represented locally through 34 unincor- 
porated associations or chapters. Each affiliated credit union is encouraged 
to join its chapter which elects a local board of directors and supervisory 
committee to administer its affairs. Chapters also have several committees 
which work in liaison with committees of the parent OCUL so as to 
provide league services to individual credit unions through the local 
chapter. 

5. The leagues in Ontario, unlike the leagues in certain other provinces, 
are empowered under the Act to examine the affairs of any member credit 
union and are bound to report to the supervisor of credit unions any serious 
irregularity which is thereby discovered. 2 The Act does not require the 
leagues to examine their members or stipulate the frequency with which 
examinations should be carried out. As a matter of practice the periodic 
examination of credit unions in Ontario is shared between the Department 
and the leagues. (See Chapter 26, "Supervision"). 



6. OCUL has also established for its member credit unions a voluntary 
stabilization fund to provide financial assistance by way of loan or direct 
grant to affiliated credit unions in financial difficulties. The stabilization 
fund was financed initially by a contribution of 1/10 of 1% of the shares and 
deposits of a participating credit union paid to OCUL on the basis of an 
interest-free 1 5 year loan. The Committee is advised that all but 1 1 members 
of OCUL participate in the stabilization fund which is available only to 
members of OCUL. The two leagues serving caisses populaires do not 
operate any similar fund and their members, together with the 34 credit 
unions not affiliated to any league, are ineligible to participate in any stabil- 
ization fund. 3 

7. The leagues in Ontario also provide a comprehensive range of financial 
services to their member credit unions. Each league, in addition to its 
educational and advisory functions, acts as a "central" for the receipt of 
surplus funds of member credit unions invested by way of depositor shares 
in the league. These funds are loaned to other member credit unions in 
temporary need of additional finances or invested in permitted invest- 
ments under section 35 of the Act. As a primary source of additional funds 
to meet the seasonal loan and withdrawal demands of local credit unions, 
league centrals are of considerable importance in maintaining the stability 
of the credit union movement. 

8. Ontario is unusual in having at the same level as league centrals 
Ontario Co-operative Credit Society (for the purposes of this report 
Ontario Co-operative Credit Society will be referred to as "OCCS"), 
which is registered under the Federal Co-operative Credit Associations 
Act, 1953. 4 Membership in OCCS is open to credit unions and co- 
operatives in Ontario although most of its business is presently trans- 
acted with credit unions. 5 OCCS was incorporated by Private Act in 
Ontario in 1949 6 to act as a central to credit unions and co-operatives 
and was sponsored, among others, by OCUL. The original intention 
appears to have been that the assets of OCUL central would be trans- 
ferred to the newly incorporated specialized central, but the proposed 
transfer did not take place. OCCS was registered under the Federal Co- 
operative Credit Associations Act in 1955. That Act also created the 
Canadian Co-operative Credit Society Limited which is a national 
central open to provincial centrals declared eligible to become members. 
So far only 4 provincial centrals have been registered. 7 Membership in 
a league by a credit union does not preclude its membership in OCCS 
or vice versa. OCCS merely provides another central available to all 
credit unions. About 580 credit unions are affiliated with OCCS, which is 
in active competition with the central department of OCUL. On several 
occasions negotiations have been commenced with a view to merging the 
two centrals as was originally envisaged when OCCS was incorporated. 



The Committee is advised that negotiations currently in progress may lead 
to the merger of these two organizations. In the view of this Committee 
such a merger would be a desirable step in the consolidation of the financial 
stability of the credit union movement. 

9. It was submitted to this Committee that membership in a league should 
be made compulsory. The Committee concluded that it would be undesir- 
able in principle to compel every credit union to belong to a credit union 
league. While strong arguments can be voiced that it is to the advantage of 
every credit union to be affiliated with a league in view of the variety of 
services offered by the leagues and the other possible benefits that may re- 
sult from membership, the Committee considers that, if a credit union 
wishes to remain independent and not join a league, as some 34 credit 
unions have currently decided, it should be free to do so. No province 
expressly requires credit unions to belong to a league, although several 
provincial credit union leagues have achieved 100% membership through 
voluntary participation. The Committee considers that it is up to the 
leagues through their services and efforts to demonstrate to all credit 
unions the overriding need to be members. 



1. The Committee understands that, effective January 1, 1970, the annual dues for 
member credit unions of OCUL will be $1.50 per member over 18 years. 

2. Section 53(8). 

3. La Federation des Caisses Populaires (C.F.) de L'Ontario Ltee. has in the past few 
years instituted the practice of appropriating $5,000 from its annual profits to a 
reserve fund to be used for the rehabilitation of affiliated caisses populaires, which it 
calls a stabilization fund. This fund, which at December 31, 1968 amounted to 
$30,000, is readily distinguishable from that established by OCUL since it represents 
a voluntary discretionary reserve to which affiliated credit unions do not directly 
contribute and in which they have no legal interest. 

4. Co-operative Credit Associations Act, S.C. 1952-53, c.28, as amended by S.C. 
1968-69, c.31. 

5. As at October 31, 1969, 580 credit unions and 161 co-operatives were affiliated with 
OCCS at which date loans outstanding to credit unions amounted to $9,950,000, 
compared with $597,000 in outstanding loans to co-operatives. 

6. The Ontario Co-operative Credit Society Act, 1949, S.O. 1949, c.133. 

7. B.C. Central Credit Union 

Co-operative Credit Society of Manitoba Limited 
Ontario Co-operative Credit Society 
Saskatchewan Co-operative Credit Society Limited. 



CHAPTER 3 

The Legislation 

1. The first statute to deal specifically with credit unions (although the 
term credit union did not appear in the Act) was The Co-operative Credit 
Societies Act which was passed in 1922 but, for a reason not apparent to 
this Committee, was not proclaimed until several years later. This Act was 
replaced in 1940 by The Credit Unions Act. This latter Act, supplemented 
and amended on a number of occasions to meet new problems and different 
conditions arising in the course of the development of the credit union 
movement in Ontario, still constitutes the basic legislation regulating credit 
unions in Ontario. Like many Acts built up from a series of amendments 
passed at different times to meet new situations as they arise, some sections 
of the Act do not mesh with others and if few sections are in direct conflict 
there are doubts and uncertainties surrounding the scope and application 
of a number of provisions. Furthermore, if other provincial legislation is 
taken as a guide, the Ontario Act is seriously deficient in several respects. 
It is silent on such basic questions as a stabilization fund, liquidity and 
audit requirements and perhaps too arbitrary in certain other areas. A few 
sections are somewhat obscure and at least one provision, that relating to 
term deposits, is, in the view of this Committee, incapable of any reasonable 
interpretation. Since it is left to Departmental practice to fill any gaps in 
the Act and to provide a meaning where necessary, it is not unexpected that 
the Department experiences some difficulty in interpreting and administer- 
ing the Act without encountering objections that it is usurping the legis- 
lative function. In some instances, such criticism may be valid for in 
certain "grey" areas, including the limitation on branch offices, the Direc- 
tor may be acting extra-legally, and at least one administrative prohibition 
relating to the permissible uses of the guarantee fund is in direct conflict 
with the wording of a section of the Act. 



2. In addition to deficiencies in the Act itself, the difficulties of determin- 
ing the nature and extent of the laws affecting credit unions are greatly 
increased by the application to credit unions of parts of The Corporations 
Act. 1 The Act is not and never has been a self-contained code of credit 
union legislation. Credit unions are corporations "incorporated by or 
under a general or special Act of the Legislature" and are therefore subject 
to the provisions of The Corporations Act 2 except where excluded by 
express provision or by necessary implication. Since The Credit Unions Act 
makes only one express reference to The Corporations Act in the limited 
context of the range of permissible investments of a credit union 3 , while 
The Corporations Act makes only two specific references to The Credit 
Unions Act 4 (in the narrow areas of cumulative voting and the use of the 

8 



word co-operative in the name of a credit union), the extent to which The 
Corporations Act supplements The Credit Unions Act can only be deter- 
mined by the imprecise and unsatisfactory test of what is not excluded by 

necessary implication. 

3. Apart from the inconvenience of having to make reference to two Acts 
in order to ascertain fully the law applicable to credit unions, the present 
legislative framework presents the additional hazard of isolated amend- 
ments being made to The Corporations Act without sufficient regard being 
had to the likely effect of a particular amendment to credit unions. By way 
of example, the enactment in 1966 of provisions in The Corporations Act 
to regulate the use and content of proxies and information circulars was 
undoubtedly not intended to apply to credit unions since, except in the case 
of corporations, members of a credit union are not permitted to vote by 
proxy. It seems possible, however, that the limited use of proxies under 
The Credit Unions Act may well be subject to the provisions of sections 
75 to 75g of The Corporations Act. There can be little doubt that the 
insider trading provisions contained in section 71 of The Corporations 
Act were not designed to apply to credit unions since each member has 
only one vote regardless of the number of shares held, the shares have no 
"market" and are in fact in the nature of withdrawable savings compar- 
able for all practical purposes with deposits. Nevertheless, since the 
language of section 71 does not clearly exclude credit unions from its 
application, it seems possible, although highly unrealistic, that the in- 
siders of a credit union must file reports of their shareholdings and any 
changes relating thereto with the Ontario Securities Commission. The 
Committee is advised that as a matter of practice the Ontario Securities 
Commission does not require such reports to be filed by credit union 
insiders, which is in the opinion of the Committee a sensible position under 
the circumstances, but it may be questioned whether this concession is 
necessarily supported by the literal wording of the insider provisions of 
The Corporations Act. 

4. It is undesirable that legislation governing credit unions should be 
unintentionally and indirectly altered as a result of specialized amendments 
to The Corporations Act which are intended to be limited to the business 
corporation but which nevertheless may affect credit unions because of the 
failure to exclude in clear language the application of such amendments to 
credit unions. The credit union movement is composed of persons who are 
in the main unsophisticated in the niceties of statutory interpretation and 
the present legislative framework which requires the consultation and 
interpretation of two statutes which do not clearly interrelate does not 
meet the basic criterion that legislation should be capable of ascertainment 
and application by those persons which it affects. 



5. The Committee recommends the enactment of a Credit Unions Act 
which would be a self-contained, comprehensive and exclusive code of the 
legislation affecting credit unions. 



1. The Corporations Act, R.S.O. 1960, c.71. as amended, 1960-61, c.13; 1961-62, c.21; 
1962-63, c.24; 1964, c.10; 1965, c.21; 1966, c.28; 1968 c.19; The Corporations 
Amendment Act 1968-69, assented to June 18, 1969. 

2. Ibid., sections 2, 17,242,285. 

3. Section 35. 

4. The Corporations Act, sections 64(2), 125(5). 

10 



CHAPTER 4 
Incorporation 

1, Credit unions in Ontario are incorporated by a procedure which so 
far as can be established is unique. It follows neither the conventional 
method of incorporation by letters patent nor is it the equivalent of in- 
corporation by memorandum and articles of association. Applications are 
made by memorandum of association in the prescribed form contained in 
the Regulation to the Act signed in duplicate before two witnesses by at 
least 20 subscribers and submitted to the Minister of Financial and 
Commercial Affairs 1 together with two copies of the proposed by-laws. 
The Minister has a discretion 2 to approve the application but he may not 
issue a certificate of incorporation without the written approval of the 
Director of the Registration and Examination Branch of the Department 
of Financial and Commercial Affairs, an official responsible to the Minister 
who, it would appear from the Act, is also vested with an unqualified dis- 
cretion in the granting or withholding of his written consent to incorpora- 
tion. 3 Although the concept of incorporation by memorandum of associa- 
tion is unfamiliar in Ontario, and in this unusual form unique among pro- 
vincial Credit Unions Acts, its use in connection with credit unions in 
Ontario is well established after some thirty years and with over 1900 
credit unions having been incorporated. There would not appear to be any 
widespread general dissatisfaction with the present procedure expressed 
by the credit union movement or by those responsible for administering the 
Act. 

2. The granting of a certificate of incorporation to a credit union in 
Ontario, as in all other provinces, is discretionary. In its first Interim Report, 
this Committee recommended in connection with the incorporation of a 
business corporation that any discretion be eliminated and that, subject to 
compliance with the relevant provisions of the statute, incorporation should 
be a matter of right. 4 The Committee considered whether the principle of 
incorporation as of right should be extended to credit unions. There ap- 
peared to be no support for such a change apart perhaps from the super- 
ficial desire for uniformity with the recommendations made with respect to 
business corporations and it appeared to the Committee that there are 
convincing reasons against such a recommendation. A credit union is 
essentially a financial institution accepting from its members money on 
deposit and as payment for shares. The intention of persons who may be- 
come members is undoubtedly to provide for themselves a method of 
saving with security and not, as in the case of business corporations, to 
put their money at risk. It seems to the Committee it is essential, before a 
credit union is incorporated, for the incorporators to establish that there 
is a potential membership, that a viable operation will result and that there 

11 



is an interest to be served by the incorporation of the proposed credit 
union. If incorporation as of right were to be extended to credit unions 
then under the present minimum requirements of the Act any group of 
20 persons who could prove a membership bond could become incor- 
porated as a credit union with a limited membership potential and with 
no prospects of a viable operation. No provincial Act permits the incor- 
poration of credit unions as a matter of right, including those provinces 
where the normal method of incorporating a business corporation is by 
memorandum and articles of association and therefore as of right. 

3. It was noted in paragraph 1 that a discretion to approve an application 
for incorporation is vested in both the Minister and the Director. The Act 
provides in section 6(1) 

"... the Minister may in his discretion, refuse to issue a certificate of 
incorporation or may issue a certificate of incorporation" 

and also provides in section 3 

"... and a certificate of incorporation may not be issued without the 
written approval of the Director". 

There is thus a double or divided discretion for, unless both the Minister 
and the Director exercise their separate unfettered discretions in favour of 
incorporation, a certificate of incorporation may not be issued. The Com- 
mittee was advised that in practice the actual examination and considera- 
tion of applications is handled by the Director who ensures that the 
memorandum and proposed by-laws are in correct form and, in addition, 
makes inquiries as to the experience and background of the proposed 
directors, manager, treasurer and sometimes the incorporators. The re- 
quirement of a double or divided discretion in the incorporation of credit 
unions is unique among provincial Acts, which without exception have a 
single discretion vested either in the Minister responsible for credit unions 
or in the provincial equivalent of the Director, upon whose approval of an 
application to incorporate a certificate of incorporation must be issued by 
the appropriate Minister. In Saskatchewan, the Registrar himself issues the 
certificate of incorporation. 5 

4. The Committee received no submissions proposing any change in the 
method of incorporation. Nevertheless, the Committee considers that the 
present double discretion is unnecessary and, particularly in the light of the 
recent legislation which transferred the discretion of the Provincial Secre- 
tary to the Minister of Financial and Commercial Affairs, thus vesting two 
separate discretions in the Minister and an official responsible to the Minis- 
ter, the Committee concluded that there should be a single discretion vested 

12 



in the Minister who would no doubt have the benefit of the experience and 
ad\ ice of the Director but who would be solely responsible for the decision 
whether to permit incorporation and grant a certificate of incorporation. 

5. If a discretion with respect to incorporation is to be maintained, 
should there be a right of appeal for those who feel aggrieved as a result 
of the exercise of the discretion? At present, in Ontario, there is no right 
of appeal and the decision of the Minister or the Director is final. Only 
one province, Nova Scotia, in its credit union legislation provides for 
a right of appeal from a refusal to grant a certificate of incorporation. 6 
The Committee considers it desirable that a right of appeal be incorporated 
into the Ontario legislation. The question then arises to what person or 
body should such an appeal lie. It does not appear to the Committee that 
the courts should be burdened with the requirement of reviewing a minis- 
terial discretion of this type and that, on balance, the appeal should lie to 
the Stabilization Board referred to in Chapter 25. It follows that, if there is 
an appeal from the exercise of the Minister's discretion, he should, if he 
declines to grant a certificate of incorporation, be required to state in 
writing to the applicants the reasons for the refusal. 

6. The Committee has also considered whether there should be included 
in the Act some statement of the factors which the Minister should be 
required to take into account in the exercise of his discretion. The Saskatch- 
ewan Act provides that the Registrar must be satisfied that "incorpora- 
tion is economically advisable" as well as otherwise approving the applica- 
tion. 7 The relevant provision in the British Columbia Act requires that the 
Inspector shall, before approving an application for incorporation, be 
satisfied that the subscribers and the proposed directors are residents of the 
province and are qualified to establish and conduct a credit union and the 
formation of the proposed credit union will be "for the convenience and 
advantage of the public". 8 None of the other provincial legislation relating 
to credit unions contains any such statement. It is questionable whether the 
Saskatchewan provision actually limits the discretion of the Registrar in 
granting certificates of incorporation for whether or not the incorporation 
of a credit union is economically advisable is ultimately a question of 
opinion. The British Columbia provision (apart from the requirement that 
the subscribers and proposed directors be residents of the province, which 
app:ars in most provincial Acts) does not fetter the discretion of the In- 
spector as to whether the proposed directors are qualified to establish and 
conduct a credit union and as to whether it will be for the convenience and 
advantage of the public, since here again this is a matter of opinion. There 
is little doubt that such factors as are specifically written into the Acts of 
Saskatchewan and British Columbia are considered in Ontario by the 
Director when processing applications for incorporation. The Committee 
considers that setting out factors which do not effectively limit or qualify 

13 



the discretion, and which in any case are considered a matter of practice, 
would not be a useful addition to the Act. 



7. The minimum number of incorporators required under the Act is 
twenty 9 , which is the highest requirement of the various provincial Acts. 
The minimum number of incorporators in most States is seven. Although 
a specified number of incorporators is required, there is no provision in the 
Ontario Act or in the Acts of the other provinces which requires that a 
credit union have a minimum membership or a minimum pool of assets 
before it can commence business. In practice, however, the Director will 
not normally give his written consent to the granting of a certificate of 
incorporation unless there are at least one hundred potential members. 
There are isolated instances where the Director has approved incorporation 
of a credit union with a potential membership of fewer than one hundred 
persons provided there is a sufficient pool of assets. Normally this occurs 
only in cases of small, isolated, rural community based credit unions in 
Northern Ontario which might not be adequately served by other financial 
institutions. It is evident that a viable financial institution organized as a 
credit union cannot be established with only twenty members and that the 
establishment of credit unions should be discouraged unless there is a 
reasonable assurance that the founding group will be able to attract a 
sufficient pool of assets. Any provision in the Act relating to minimum 
membership potential or a minimum pool of assets can at best be arbitrary 
and could work a hardship in given cases. One advantage of the present 
system is that the Director, while laying down guidelines for those seeking 
incorporation, retains a degree of flexibility. The Committee is of the opin- 
ion that the present discretionary system is preferable to inserting a fixed 
minimum organizational potential in terms of minimum membership and 
minimum pool of assets as prerequisites of the granting of a certificate of 
incorporation or the commencement of business. The Committee is also of 
the view there should be no change in the minimum number of incorpora- 
tors. If there is a real desire and need for the incorporation of a credit union, 
it will not be difficult to find twenty subscribers to the memorandum. The 
Committee does recommend that the necessity for having two witnesses to 
each signature 10 be replaced by the more customary single witness. 

8. The Regulation to the Act prescribes that a fee of $20 shall be charged 
as an incorporation fee. The Committee was advised that the present fee, 
which has remained unchanged since 1953, is no longer sufficient to cover 
the Departmental expenses incurred in the processing of applications for 
incorporation. The Committee recommends that the fee for incorporation 
be at least equal to the costs involved in processing the application and 
that a consequent adjustment be made to the amount presently contained 
in the Regulation. 

14 



9. The Committee recommends that: 

(a) incorporation of a credit union should not be a matter of right but 
should continue to be discretionary; 

(b) the present double discretion vested in the Director and the Minister 
relating to the incorporation of a credit union be replaced by a single 
discretion vested in the responsible Minister; 

(c) if the Minister refuses to issue a certificate of incorporation he should 
be required to state his reasons therefor to the applicants for incorporation; 

(d) an appeal should lie to the Stabilization Board referred to in Chapter 
25 from the refusal of the Minister to issue a certificate of incorporation; 

(c) no provisions be included in the Act setting forth the matters to be 
considered by the Minister in the exercise of his discretion. 

(f) no change be made in the minimum number of incorporators now 
required; and 

(g) it is neither desirable nor feasible to include in the Act any require- 
ment governing minimum membership or minimum assets as a condition 
of incorporation or carrying on business. 



1. Under Bill 199, The Credit Unions Amendment Act, 1968-69 (No. 2), which 
became effective on October 31, 1969, the responsibilities of the Provincial 
Secretary under The Credit Unions Act were transferred to the Minister of 
Financial and Commercial Affairs. 

2. Section 6(1). 

3. Section 3. 

4. Select Committee on Company Law, First Interim Report, 1967, Chapter I, 
Section 1. See also Bill 125, The Business Corporations Act, 1st Session, 28th 
Legislature, Ontario, 17 Elizabeth II, 1968. 

5. Saskatchewan Act, section 6. 

6. Nova Scotia Act, section 7(6). 

7. Saskatchewan Act, section 6. 

8. British Columbia Act, section 11(2). 

9. Section 5(1). 

10. R.R.O., 1960, Reg. 67, Form 1. 

15 



CHAPTER 5 
Objects and Powers 

1 . There is some uncertainty as to the nature and scope of the incidental 
and ancillary powers of a credit union. Section 4(2) of the Act provides that 

"As incidental and ancillary to the objects set out in subsection 1, a 
credit union may, 

(a) make loans to other credit unions ; 

(b) deposit moneys with and make loans to any league incorporated 
under section 53 or a predecessor thereof so long only as the 
amount so deposited or loaned does not exceed 25 per cent of its 
share capital and deposits; 

(c) subject to confirmation by its members at an annual or special 
general meeting, make donations and gifts out of its surplus 
income or any undivided earnings, other than the guarantee fund, 
for the purpose of advancing the interests of the credit union or of 
credit unions generally." 

As a credit union is a corporation to which Part II of The Corporations 
Act applies, there is some question, particularly in view of section 4(2), 
whether the incidental and ancillary powers contained in section 22(1) of 
The Corporations Act apply to credit unions, and, if so, to what extent. 

2. Before 1956, section 4 of that Act contained only objects and purposes 
and it was generally considered that the incidental and ancillary powers in 
section 22(1) of The Corporations Act applied, mutatis mutandis, to credit 
unions, except where inconsistent with the objects and purposes contained 
in section 4 of The Credit Union Act. In 1956, section 4 was amended, 
rearranging the section to its present format by relegating to incidental and 
ancillary powers certain provisions which before 1956 were classified as 
objects and purposes, and adding the power in section 4(2) (c) to make 
certain donations. The effect of this amendment may have been to exclude 
entirely the application of section 22(1) of The Corporations Act although 
the Committee was advised that the amendment was not intended to have 
such a far-reaching result. 

3. Whatever view may prevail as to the effect of the amendment to sec- 
tion 4, the situation is unsatisfactory. If the incidental and ancillary powers 
of a credit union are limited exclusively to those contained in section 4(2), 
they are too restrictive. If the effect of section 4(2) is not to deprive a credit 
union of the benefit of the incidental and ancillary powers contained in 
section 22(1) of The Corporations Act, then the incidental and ancillary 
powers of a credit union are, in the opinion of the Committee, too broad. 

16 



A credit union should possess certain, but not all, of the incidental and 
ancillary powers contained in The Corporations Act. In the view of the 
Committee and without attempting to be exhaustive on the subject, it 
appears that the incidental and ancillary powers contained in clauses 
(g)» (0> (0» (°)» ( s ) anc * (v) of section 22(1) of The Corporations Act should 
be enjoyed, mutatis mutandis, by credit unions. 

4. The Committee recommends that the Act be amended to include 
specifically as incidental and ancillary powers enjoyed by credit unions 
those contained in the clauses to section 22(1) of The Corporations Act 
above referred to. 



17 



CHAPTER 6 
By-laws 

1 . Section 1 5 of the Act provides : 
"15. By-laws of a credit union may, 

(a) prescribe the purposes for which the profits of the credit union 
may be appropriated; 

(b) prescribe the maximum number of shares that may be held by a 
member thereof; 

(c) prescribe the maximum amount that may be deposited by or 
loaned to a member thereof; 

(d) provide for the expulsion and withdrawal of members thereof; 

(e) prescribe the form of any instrument necessary for carrying the 
purposes of a credit union into effect; and 

(f) provide for such other matters as are authorized by the regula- 
tions." 

There must be filed with the Minister, as part of an application for incor- 
poration, two copies of the proposed by-laws of the credit union sought 
to be incorporated. The Committee understands the Director will only give 
his approval to the issuance of a certificate of incorporation if the proposed 
by-laws filed are in the form of the so-called "Revised Standard By-laws 
1966" which have been developed through consultation between the 
Department and OCUL. The Regulation under the Act provides that at a 
meeting of the subscribers to the memorandum of association "by-laws 
shall be enacted" but the Regulation does not state that the by-laws which 
shall be enacted are the proposed by-laws filed as part of the application 
for incorporation and approved by the Director in connection therewith. 
This is an inconsistency in the Regulation which it appears should be 
remedied. 

2. After the proposed by-laws filed with the application for incorpora- 
tion are enacted, the Act provides that no by-law or amendment of a 
by-law is operative until it has been approved by the supervisor. 1 There 
is accordingly a discretion in the Department over the by-laws of a credit 
union, and amendments thereto, both prior to and after incorporation. 
Since, under the Act, the by-laws of a credit union form part of its char- 
ter 2 , new by-laws or amendments to existing by-laws represent a change 
in or alteration of its charter. 

3. Section 15 of the Act would not appear to provide a broad enough 
statutory basis for many of the matters which are included in the by-laws 

18 



of a credit union. Section 15 in its present form has appeared in the Act 
since its first enactment in 1940. Pursuant to the 1940 Act, Regulations 
were passed which, in effect, prescribed standard by-laws for credit unions. 
These Regulations were superseded about 1950 when a new Regulation, 
virtually identical with the present Regulation, was introduced. The effect 
has been to render subparagraph (f) meaningless and to cast doubt on 
the statutory authority for a number of provisions of the by-laws which 
cannot be brought within any of the matters referred to in subsections 
(a) to (e) inclusive of Section 15. 3 The Committee is of the opinion 
that Section 15 should be revised to provide a proper statutory base for 
the by-laws. 

4. The Act itself is silent on the procedure for the enactment of a by-law. 
However, the Revised Standard By-laws provide: 

'The Directors of the credit union may from time to time make by-laws 
not contrary to the Certificate of Incorporation or The Act and from 
time to time amend, vary or repeal the same provided that no such 
by-law, repeal, amendment or variation thereof shall take effect until 
confirmed or approved by a vote of two-thirds of the members present 
at a members' meeting duly called for the purpose of considering the 
same and has been approved by the Supervisor of Credit Unions 
pursuant to Section 16 of The Act." 

It appeared to the Committee somewhat anomalous that the procedure 
for enacting by-laws should, in Ontario, be contained in Revised Standard 
By-laws rather than in the Act as in most other provinces. The Com- 
mittee recommends that the Act itself should set out in detail the procedure 
to be followed for enacting by-laws of a credit union. 

5. In most provinces there are official standard by-laws or rules applic- 
able to all credit unions which are prescribed in Regulations to the relevant 
provincial Act or by the responsible Minister pursuant to authority con- 
tained in the provincial Act. 4 Amendments to such standard by-laws or 
rules are accordingly made applicable to all credit unions in the particular 
province, thereby ensuring uniformity among the basic by-law provisions 
of all credit unions. Where such official by-laws or rules are in force, 
supplementary by-laws may be enacted by a credit union provided they 
are not inconsistent with or do not in any way alter the governing standard 
by-laws, except as permitted by the statute or by the official by-laws them- 
selves. Such supplementary by-laws must receive the discretionary approval 
of the provincial authority. The Committee considered whether it would 
be desirable to enact, by Regulation, official standard by-laws which would 
be applicable to all credit unions as seemed to be the case under the earlier 
Regulations referred to above. The position in Ontario is that the by-laws 
of credit unions may vary considerably particularly as a result of individual 
amendments approved by the supervisor. There would seem to be no 

19 



compelling reason for the enactment of official by-laws. To do so would 
eliminate any flexibility which might be appropriate in a given case and 
would undoubtedly cause considerable disruption, particularly in the case 
of older credit unions. 

6. The requirement that every by-law or amendment to a by-law be 
approved by the supervisor before it is effective has been the subject of 
some criticism which the Committee considers to be justified with respect 
to by-laws concerned with purely routine matters such as the amendment 
of the locality in which the annual meeting of a credit union may be held. 
Such an amendment is unlikely to be so contraversial or of such sub- 
stance as to require the approval of the supervisor and the requirement 
for submitting such a by-law for approval constitutes an unnecessary 
inconvenience to both the supervisor and the particular credit union. 
Although it would be advantageous to the credit union and to the super- 
visor to be relieved of what is an irksome requirement in such a case, the 
Committee does not see how it would be possible to separate those 
amendments which clearly warrant the prior approval of the supervisor 
and those which do not. The membership bond and lending limits are 
clear examples of the former and the location of the annual meeting an 
example of the latter, but many of the other by-law provisions are per- 
haps less clear. In the view of the Committee, it is preferable to retain the 
requirement that all by-laws be subject to the approval of the supervisor 
despite the inconvenience which is sometimes involved, particularly since 
the by-laws form part of the charter of a credit union. 

7. It was submitted to the Committee that the discretion to approve 
by-laws and amendments to by-laws be vested in the leagues rather than 
in the supervisor. It was suggested that the leagues were best suited to 
pass upon by-laws and amendments because of their general apprecia- 
tion of credit union problems through their inspection services and other 
activities in the credit union movement and their specific knowledge of 
the problems of a particular credit union by reason of its affiliation with 
that league. It would appear to the Committee that the effectiveness of 
such a proposal would depend upon every credit union being a member 
of a league and the Committee has recommended against making member- 
ship in a league compulsory. 5 In addition and of greater importance is 
the fact that the by-laws contain the membership bond of the particular 
credit union and the Committee considers it would be undesirable in 
principle to vest in the leagues the responsibility for approving by-law 
changes which would alter the membership bond. Moreover, under the 
Act, the by-laws form part of the charter of a credit union and it would 
seem anomalous to the Committee to permit changes to the charter to be 
approved other than by the provincial authority. The Committee therefore 
cannot accept the proposition that the discretionary power to approve 
by-laws or amendments be vested in the leagues. 

20 



8. The Committee recommends that : 

(a) the Regulations provide that the by-laws enacted at the first meeting 
be those submitted with and approved as part of the application 
for incorporation; 

(b) the Act be amended to provide a proper statutory base for the 
by-laws; 

(c) the Act be amended to set out the procedure for the enactment of 
by-laws; and 

(d) the requirement that all by-laws and amendments to by-laws be 
approved by the supervisor before the same are effective be retained. 



1. Section 16(1). 

2. Section 6(3). 

3. Compare section 67(1) of The Corporations Act. 

4. Alberta, British Columbia, Manitoba, Newfoundland, New Brunswick, Nova Scotia, 
Saskatchewan. 

5. See Chapter 2, supra. 

21 



CHAPTER 7 

Shares 

1. Section 19 of the Act provides that a credit union may create a capital 
divided into shares and states that "the amount thereof, the number of 
shares, and the payments thereon, shall be determined by its by-laws, 
but the amount of each share shall in no case exceed $10". Section 20 of 
the Act provides that "the capital of a credit union may, subject to the 
by-laws, be increased by subscriptions for new shares or the admission 
of new members, and it may be diminished by withdrawals". The Revised 
Standard By-laws provide with respect to share capital that "the value of 
each share of the credit union shall be $5.00". No maximum number of 
shares is fixed. The Revised Standard By-laws also provide that "money 
paid in as payment for shares or instalment of shares may be withdrawn 
on any day when payment for shares is received, provided that the Board 
of Directors may require a member at any time to give sixty days' notice 
of his intention to withdraw any moneys paid in as payment for any 
share or shares". In keeping with co-operative principles, each member 
of a credit union has only one vote, regardless of his shareholdings. 1 



2. Shares, so called, in a credit union bear little resemblance to shares 
in a business corporation. There is no maximum share capital fixed under 
either the Act or the Revised Standard By-laws (except to the extent that 
the by-laws of a credit union may fix the maximum number of shares 
which may be held by any member). Despite the fact that the by-laws 
normally provide for a period of notice prior to the withdrawal of shares, 
this requirement is seldom enforced and shares are, in practice, withdraw- 
able on demand. In consequence, the amount received by a credit union 
as payment for shares will vary throughout the year. While from a strictly 
legal point of view shares in a credit union may be regarded as risk capital 
in the event of liquidation, they resemble more closely savings deposits. 
Members of a credit union receive by way of dividend on shares a dis- 
cretionary distribution from profits at a rate determined at the end of the 
financial year. 2 In Ontario the preponderance of savings in a credit union 
is held in shares rather than deposits largely to take advantage of the life 
insurance provided by nearly all credit unions on individual shareholdings 
up to a maximum of $2,000 and this incentive is probably one of the reasons 
why shares in a credit union turn over at a slower rate than deposits. Des- 
pite a right in the by-laws to require notice for the withdrawal of shares 
and the power of the board of directors to limit withdrawals from share 
accounts to a proportion of a member's shareholding if it considers that 
the capital of a credit union has been impaired, 3 credit union shares 
cannot be regarded as permanent capital. 

22 



3. The Committee considered whether a credit union should be required 
to have a permanent share capital which could not be used by a member 
as security against a loan or withdrawn except upon withdrawal from 
membership of the credit union. All other savings would be in the form 
of deposits. Such a capital structure is proposed in the latest draft of the 
proposed Manitoba Credit Unions Act. The Committee concluded that 
the present capital structure of credit unions, although anomalous, has 
worked well hitherto and that rationalization was not of itself sufficient 
reason to recommend any major change. To create and limit shareholdings 
to a class of permanent capital might have the effect of nullifying the 
advantages of free insurance on individual shareholdings up to $2,000 
which is viewed as an important attraction to membership in a credit 
union. 

4. The Committee recommends that no change be made in the present 
capital structure of credit unions. 



1. Section 24. 

2. Section 44. 

3. Section 20(4j. 



23 



CHAPTER 8 
Membership Bond 

1. As a co-operative dealing exclusively in money, a credit union, in 
keeping with basic co-operative principles, is restricted by statute to 
accepting moneys from and making loans to its members. However, 
unlike a typical co-operative in which membership is open to anyone on 
the basis of similarity of needs (subject only to such membership condi- 
tions as may be imposed by the particular co-operative) membership in a 
credit union in Ontario is limited to persons sharing a pre-existing member- 
ship bond coming within a class or kind set out in section 8 of the Act, 
which provides that "the membership of a credit union shall be limited to 
persons having a common bond of occupation or association or to persons 
within a well-defined neighbourhood or community". The membership 
bond of a particular credit union is contained in its by-laws and not in its 
certificate of incorporation as might be expected. Under present incorpo- 
ration procedures, the Department must approve the proposed by-laws of 
the credit union and this gives the Department an opportunity of reviewing 
the proposed membership bond to determine if it does, in fact, come within 
the requirements of section 8. Equally, no amendment to the by-laws may 
be made without the approval of the supervisor, so that a credit union, 
once incorporated, may not change its membership bond without the prior 
approval of the Department. The Departmental interpretation of section 8 
is therefore instrumental not only in determining the individual size and 
scope for development of a particular credit union, but also in governing 
the growth and competitive position of the credit union movement vis-a-vis 
other financial institutions. A narrow interpretation can have the effect 
of producing a large number of independent, small and narrowly based 
credit unions, while a broader interpretation can result in fewer but larger 
credit unions which, because of their size, are better able to provide the 
variety of services offered by competing institutions and increasingly de- 
manded by credit union members. The present requirement that all 
members of a credit union come within a membership bond and the 
Departmental interpretation of what constitutes a membership bond 
within the meaning of section 8 are major matters to be considered in the 
future development of credit unions and the credit union movement as a 
whole. 

2. The requirement of a membership bond appears to have originated 
with the caisses populaires Desjardins. Under early Quebec legislation, 
membership was limited to those persons residing in an electoral district. 1 
However, in the early development of the caisses populaires, membership 
seems to have been limited in practice to the inhabitants of the parish. 
The principal aim of Desjardins and his followers was to promote thrift 

24 



and to establish co-operative savings and credit facilities organized for 
and administered by communities not adequately served by banks or other 
financial institutions. 2 A bond of co-operation and confidence among the 
membership and particularly in those responsible for the administration of 
the assets of the caisse populaire was essential to the success and growth 
of early caisses populaires which depended for their funds for loans to 
members almost exclusively upon the savings of other members invested 
in the caisse populaire. The parish in semi-rural Quebec at the turn of the 
century provided the ideal unit for the establishment of caisses populaires. 
It was reasonably small in area and population and constituted and en- 
compassed a well-defined community made up of persons who, by reason 
of their daily contacts, were linked by a social bond. 3 

3. The common bond of occupation and association, which is the mem- 
bership bond most widely used by credit unions in Ontario, was developed 
when the credit union movement spread to the United States. Its exact 
origin is obscure but it has been suggested that it was originally a device 
for the propagation of credit unions and was only later erected into 
fundamental dogma. 4 In the mid 1920's when credit unions were actively 
promoted in urban areas by Edward I. Filene and his followers, there 
was already a well developed banking system and several types of credit- 
oriented financial institutions were competing for the growing custom of 
the American consumer in urban residential areas. The credit unions 
were late comers in the well-diversified American financial system. 5 It 
may be speculated that the existence of such well-established financial 
institutions made it difficult to organize successful credit unions on a ter- 
ritorial basis and the invention of a common bond of occupation or 
association probably provided a means whereby social groupings were 
created which cut across residential boundaries and provided the credit 
union movement with new, relatively untapped markets in which it was 
easier to organize successfully. In the result, the great majority of credit 
unions in the United States are organized with a common bond of occu- 
pation or association. 6 

4. Under The Co-operative Credit Societies Act, enacted in 1922 but 
not proclaimed until 1928, early credit unions in Ontario were organized 
on a community basis, since that Act provided that members had to be 
domiciled within 20 miles of the registered office of the credit union. 7 
The enactment of The Credit Unions Act in 1940 provided for the first 
time the alternative membership bond of a common bond of occupation 
or association. The influence of the United States credit union rather than 
the caisse populaire was predominant in the development of the credit 
union movement in Ontario with the result that a large majority of credit 
unions were founded with a membership bond based on a common bond 
or occupation or association rather than on a membership bond based 
on residence. 

25 



5. The distribution of active credit unions in Ontario at December 31, 
1968 by types of membership bond was as follows 8 : 

Industrial and Commercial 713 

Public Service 273 

Association Urban 161 

Association Rural 10 

Religious Urban 228 

Religious Rural 76 

Community Urban 48 

Community Rural 141 

In terms of membership and assets the largest credit unions in Ontario 
are organized with a common bond of occupation and, in contrast with 
other provinces, over 75% of credit unions presently incorporated are 
organized with a common bond of occupation or association. The pre- 
ponderance of the occupational bond is due partly to greater industrial- 
ization, particularly in southern Ontario, to the influence of the United 
States credit union movement in the establishment of credit unions in 
Ontario and to the effects of a long standing administrative policy which 
has hitherto given a very restrictive interpretation to the phrase "well- 
defined neighbourhood or community". 

6. Under the administrative policy of the Department the interpretation 
of "well-defined neighbourhood or community" seems to have been 
governed as much by the size of potential membership of a credit union 
in a particular area as by a determination of whether the area truly en- 
compassed a well-defined neighbourhood or community. At one time the 
maximum size of a community in respect of which a certificate of incor- 
poration would be issued to a credit union was fixed at the arbitrary 
figure of 4,000. This limit was later raised to 6,000 and still later to 10,000. 
While the Committee is informed that there is today no such arbitrary 
numerical limit, it is nevertheless the view of the Department that the 
potential size of the membership of a community is still the guiding factor 
and as a matter of policy the Department probably will not permit a 
membership bond based on residence in a community if the membership 
potential in that community would be more than 15,000. The present 
administrative policy would not permit the incorporation of a credit 
union to serve the residents of any of the cities although these could be 
said to constitute "a well-defined community". 

7. Despite former arbitrary limits of 4,000, 6,000 or 10,000 on the 
maximum membership potential of a credit union organized in a well- 
defined neighbourhood or community, and the traditional policy of con- 
fining such credit unions to relatively small neighbourhoods or com- 
munities, the attitude of the Department has not been absolutely rigid. 
This is well illustrated by the selective development of credit unions with 

26 



a "study club bond". These arose mainly in the case of thriving occu- 
pational credit unions organized in an industry that had closed down or 
moved elsewhere. The common bond of occupation thereupon ceased, 
but there remained a pool of assets with an organized group of members 
which might have been operating profitably for some years. Rather than 
force liquidation of such credit unions, the Director has allowed the 
membership bond to be changed to membership in a study club with a 
wider area from which to attract members than would be permitted for a 
community credit union. The common bond of occupation thus became 
a common bond of association, but instead of a common bond being 
the corner stone of the credit union, it is "found" ex post facto in order 
to preserve a viable credit union where membership had lost its common 
bond of occupation. To resort to amending a common bond of occupa- 
tion to membership of a study club in order to create an associational 
bond would appear to be an expedient device to produce a sensible solu- 
tion in an unrealistic situation which has indirectly fostered, on a selective 
basis, what in effect are community credit unions in the guise of a study 
club. Membership in a study club credit union is open to the former 
employees of the plant and such other persons who are rendered eligible 
for membership by joining and attending a minimum number of meetings 
of the study club organized by the credit union and administered by its 
officers. The field of membership from which they may recruit persons 
eligible to become members of the study club and thereby of the credit 
union is in at least two study club credit unions wider than the present 
permissible boundaries of a well-defined community. Although such credit 
unions are in substance community credit unions, they could not have 
been incorporated as such under present Departmental policy. 

8. The opportunities for mergers between credit unions are also depen- 
dent upon the prevailing attitude of the Department towards the permissible 
scope of section 8. Because a credit union may deal only with its members, 
who in order to be eligible for membership must be within the member- 
ship bond of the particular credit union, mergers between credit unions 
are possible only where the membership bond of the enlarged credit union 
is such as to render eligible for membership all members of the credit 
unions constituent to the merger. Consequently, unless the membership 
bonds of the merging credit unions happen to be identical or overlapping, 
mergers between credit unions necessitate amendments to the membership 
bond which, in the case of mergers involving community credit unions, 
will be permitted only if the potential field of membership of the enlarged 
credit union is within the restrictive limits imposed by the Department. 
However, as in the case of study club credit unions, the attitude of the 
Department towards mergers is more pragmatic; if a merger is desirable 
in order to preserve the solvency of a credit union, a membership bond 
will be found. 

27 



9. The present administrative policy in Ontario with respect to com- 
munity credit unions varies with that of other provinces despite basic 
similarities in the wording of the membership bond provisions in most 
provincial Credit Unions Acts. 9 There is a city-wide credit union for 
Saskatoon, and membership in the Sherwood Credit Union which, with 
some 25,000 members and assets of over $27,000,000 is one of the largest 
credit unions in Canada, is open to residents of the city of Regina. There 
are also city-wide credit unions in Vancouver, Calgary and Winnipeg. 
Under the present practice in Ontario it would not be possible to organize 
a community credit union in any city of comparable size. 

10. In contrast with Ontario, the credit union movements in Manitoba, 
Saskatchewan, Alberta and British Columbia are centered around com- 
munity credit unions with occupational credit unions in a minority in 
number, size of membership and assets. 10 This may be due to the different 
historical development of the credit union movement in these provinces 
and particularly to the well established existing system of community co- 
operatives which provide the basic ideological framework for the organiza- 
tion of credit unions. In addition, the population spread in these provinces 
may have been partly responsible for the early development of large com- 
munity credit unions. The Committee is advised that no problems have 
arisen with respect to large community based credit unions probably due 
in part to the existence of "professional" management. In fact it has been 
indicated to the Committee that a large community based credit union 
may result in a sounder financial institution since it serves a broader 
cross-section of the population and is less likely to be affected by adverse 
conditions in a particular industry. 

11. Whether or not changes are necessary or desirable, either in the 
membership bond itself as set out in section 8 or in the Departmental 
policy, must of necessity lead to a consideration of the purposes, if any, 
which the membership bond fulfils and the necessity to retain it under 
present conditions as a basic requirement of a credit union. The member- 
ship bond has traditionally been regarded as fulfilling several purposes. 

Firstly, it is said that it helps to create a sense of personal involvement 
among the members. There is incentive to contribute to a local savings 
and loan institution which is run by and for the benefit of members who 
are linked together by a common bond, and which is operated by the 
membership itself through its duly elected directors and committees. In a 
credit union having as its membership bond the employees of a small plant, 
the sense of personal involvement and participation may be real and 
effective, since many of the employees would be known to each other. How- 
ever, the larger the credit union, generally the more impersonal it becomes 
and this tends to weaken the sense of personal involvement, particularly 
when a credit union has reached the size where it must employ "pro- 

28 



fessionar help. It is questionable if there is any real common bond in a 
credit union organized on an occupational basis, with over 13,000 members, 
other than membership in the credit union itself and certainly the personal 
involvement of the vast majority of its members must be minimal. The 
situation is perhaps best summarized in the Report of the Royal Com- 
mission on Banking and Finance, at page 161, 

"One should not exaggerate the strength of this sense of involvement 
because a high proportion of members do not in fact participate 
actively in the management of locals or even attend general meetings. 
Nevertheless, it is characteristic that the members feel more closely 
associated with their caisse or credit union than they do v/ith a bank 
branch, believe themselves freer to discuss their finances with an 
officer of a local society, and have more confidence that they will get 
sympathetic treatment from them than from officials of larger and more 
remote institutions." 

Secondly, credit unions have a low loss ratio and it is claimed that this 
results in part from the existence of a common bond requirement. It is 
claimed there is an enhanced duty on the part of the borrower to repay 
loans which are made from the savings of his neighbour or fellow member. 
In a small credit union, the credit committee may know the borrower 
personally or at least be able to obtain references from mutual acquaint- 
ances within the membership. Such knowledge may be most valuable in 
the case of unsecured character loans and can also be useful in assessing 
the member's current needs, financial resources and proposed security. 
Larger credit unions usually employ full-time loan officers in lieu of the 
voluntary credit committee and their whole lending operation is profes- 
sionally organized. Personal knowledge of member's credit-worthiness 
which is claimed to exist as a result of the membership bond would seem 
to diminish as the membership of the credit union becomes larger. 

Thirdly, it could be said the common bond requirement facilitates the 
external and internal control of credit unions by limiting their potential 
size and scope of operations. The efficacy of the common bond as a means 
of control depends partly on how far membership after incorporation is 
confined to persons who are within the membership bond as set out in 
the relevant by-laws. It is generally agreed that once a certificate of incor- 
poration has been granted it is in practice extremely difficult to check the 
membership of the credit union in order to ensure compliance with the 
relevant by-law. The regular examination by the Department or a league 
does not usually include an inspection of membership lists to determine 
that all members are within the membership bond. There is also provision 
in the Revised Standard By-laws to the effect that should a member cease 
to have the common bond which qualified him to join the credit union 
either because of change of employment, resignation from the association 

29 



or leaving the neighbourhood, the directors may request that member to 
withdraw. 11 It is understood that this by-law is rarely acted on since 
management is reluctant to suffer a withdrawal of share capital. In conse- 
quence there must be a certain percentage of members of credit unions 
in Ontario who are outside of the membership bond. The Committee 
was advised that, in the case of one credit union organized with an occu- 
pational bond, consisting of the employees of a particular company, 
about 2,200 members were no longer employed by the company. 

12. It must therefore be considered whether there is any purpose in 
retaining the common bond as an essential prerequisite for membership 
of a credit union. Thus far, it would appear that the sense of personal 
involvement and democratic participation, the added incentive to repay 
loans and lower ratio of delinquency, which are claimed as desirable 
consequences of the membership bond, are persuasive only in the case of 
small credit unions. One might speculate how far a similar sense of 
participation and close control and the attendant advantages which are 
claimed to result therefrom might similarly be accomplished merely by 
placing a numerical limit on the size of any society otherwise open to 
anyone but organized as a co-operative credit society. 

In the course of later development, credit unions have been formed and 
successfully operated in several provinces with a membership of more 
than 20,000 administering assets sometimes exceeding $25,000,000. The 
membership bond in such credit unions has become so attenuated as to be 
of little significance, because of the size of the membership. The success 
of such large credit unions, which really operate with no effective bond 
joining the members except that of membership in the same credit union, 
is in the view of the Committee due to improved management techniques 
in the use of loan officers, auditors, etc. although at the expense of the 
traditional committee structure. If the membership bond has little meaning 
in the large credit union should it continue to be required without excep- 
tion for all credit unions? In other words, should a well managed credit 
union with a successful record be prevented from offering its services to a 
broader segment of society through the application of a requirement, 
which although perhaps of importance in the earlier days of the move- 
ment, may very well have lost its significance in the emerging pattern of 
credit unions? 

13, The credit union movement in Ontario has experienced rapid growth 
since World War II. In 1945 there were 266 credit unions with total assets 
of $6,894,000 compared with 1650 active credit unions with total assets 
of about $700,000,000 at December 31, 1968. But in common with other 
provinces, the growth rate has declined in recent years, partly as a result 
of increased competition from chartered banks, small loan companies, 
finance companies and, to a lesser extent, the loan and trust companies. 

30 



In order to maintain their competitive position, credit unions are constantly 
having to expand their range of services so as to match those available to 
credit union members from other financial institutions. Chequing facili- 
ties and term deposits are two examples of relatively new credit union 
services which are likely to become standard. 12 In order to offer their 
members these new services, credit unions have to be of a certain mini- 
mum size cither by law in the case of chequing privileges, or from a 
commercial standpoint. 

14. It is not, therefore, surprising that current statistics reveal a con- 
tinuing trend towards dissolution of credit unions with assets of $50,000 
or less. In other provinces, the pressures of increased competition have 
led to the consolidation of the credit union movement into fewer and larger 
units by mergers and the use of branch offices in order to preserve credit 
union representation in areas too small to support a viable independent 
credit union of a size able to compete with other financial institutions. 
This has not occurred in Ontario, where there are still over 600 credit 
unions with assets of less than S 100,000, because of policy restrictions 
upon the size of community credit unions, the use of branch offices and 
mergers. 

15. Although the credit union movement in Ontario is principally com- 
posed of occupational credit unions, the Committee is of the view the 
future growth of the movement rests in the development of community 
based credit unions. The reasons for this conclusion are twofold. Firstly, 
the Committee considers that as a matter of principle, every person should 
have the opportunity to avail himself of the services of a credit union if 
he so wishes. As the Act is presently applied, membership of a credit 
union is restricted to a minority of the population in Ontario whose place 
of employment happens to have an occupational credit union, those who 
are members of a church or club which has organized a credit union with 
a bond of association, those who live in an area small enough to constitute 
a well-defined neighbourhood or community as presently interpreted and 
in which a community credit union has been organized, or to members 
oi' the so-called study club. The only means by which most persons will 
be rendered eligible for membership in a credit union is through the ex- 
pansion and development of community credit unions since they alone 
are capable of reaching large segments of the population. Secondly, the 
growth of occupational credit unions is inhibited by their narrow member- 
ship base. An occupational credit union may recruit members only from 
the employees (and sometimes their dependants) of the firm in which it 
is organized, and while the actual number of employees depends upon the 
employment policies of the particular firm, it is likely that in most cases 
the field of membership will be smaller than that in many community 
credit unions even as presently interpreted by the Department. There is 
some evidence that certain large occupational credit unions are nearing 

31 



the limit of their potential growth and the Committee is aware that appli- 
cations are being made in several cases to amend the membership bond 
to a community bond, which would enable such credit unions to expand 
beyond their present membership limits imposed by industrial or occupa- 
tional bonds. However, in view of the prevailing policy towards large 
community credit unions, industrial or occupational credit unions are 
not usually able to expand their membership base by change of bond. 
Equally, occupational credit unions are more susceptible to the adverse 
effects of a local economic slowdown, strikes or lay-offs than a community 
credit union whose membership is likely to include a broader cross-section 
of trades and occupations. The question of administrative policy with 
respect to the interpretation and application of section 8 "a well-defined 
neighbourhood or community" is, therefore, central to the question of 
the future development of the credit union movement in Ontario. 

16. There will always be a place for a number of smaller credit unions 
organized in parish communities in which the members are linked by a 
genuine social bond and prefer local control over their savings and a 
closed membership to the advantages of the greater range of services a 
larger credit union would offer. The same is true of many credit unions 
formed with an ethnic bond of association. The advantages of saving or 
making loan repayments by payroll deduction and the convenience of 
in-plant banking are factors which may encourage the continuance of a 
number of occupational or industrial credit unions. 

17. However, the Committee is of the view that the Act should provide 
a framework whereby any credit union, which is unable to provide the 
services which its members require and should have, should be able to 
amalgamate or transfer its assets to a larger and well established credit 
union or amalgamate with other credit unions to form a viable unit. 
This, in the opinion of the Committee, could best be accomplished through 
the creation of community based credit unions. The consolidation of the 
credit union movement may tend to accelerate the development of credit 
unions into impersonal financial institutions in which the members feel 
little sense of personal involvement, but this appears to be a necessary 
consequence if the movement is to grow and prosper. 

18. Accordingly, the Committee recommends that a broader interpreta- 
tion be given to section 8 of the Act so as to facilitate those credit unions 
which seek to change their membership bond to a community bond with- 
out the imposition of a limitation on the size of the community to be 
served. The test should be not the size of the community, but rather the 
managerial capacity and past record of the credit union seeking to serve 
an enlarged membership. Whether or not adequate management exists is 
a matter which should be determined by the Department at the time the 
credit union seeks to amend its membership bond. The same principle 

32 



should govern the incorporation of a credit union. There should be no 
arbitrary limit set on the size of a community to be served by a credit 
union seeking incorporation: rather the test should be the availability to 
such proposed credit union of competent management, a factor which 
the Department takes into account in the incorporation of any credit 
union. 

19. Some of the present difficulties may result from the language of 
section 8 and in particular the use of the words "well-defined neighbour- 
hood" with its connotation of smallness and which may have encouraged 
the present restrictive approach towards the establishment of community 
credit unions. However, it should be noted that section 8 does provide 
for two separate, independent, alternative territorial units within which a 
credit union may be organized, ie. a "well-defined neighbourhood or 
community" and in our view the word "community" does not necessarily 
presuppose a small community of 10,000 to 15,000 persons. Nevertheless, 
to remove any possible legislative restrictions upon the development of 
larger community credit unions and in order to implement the recommen- 
dations of the Committee in this respect, it is recommended that section 8 
be amended to provide that membership in a community credit union be 
open to "persons residing or working within a metropolitan area, city, 
town or other reasonably well-defined community". 

20. If, as the Committee recommends, section 8 of the Act is amended 
and interpreted so as to clarify and relax the present membership bond 
requirement in order to encourage and facilitate the development of large 
community credit unions having a broadly based membership with the 
principal criterion for expansion being demonstrable managerial com- 
petence and efficiency, the Committee envisages the development of 
several large community credit unions catering to a very wide field of 
membership which would, in our opinion, in effect be operating without 
a membership bond requirement except in name. This, the Committee 
understands, is the position already reached by several credit unions with 
city-wide membership bonds in other provinces. Rather than preserve the 
fiction of a membership bond requirement where the credit union is per- 
mitted to serve a large community, it would be more accurate and, in 
the Committee's view, preferable to state that such credit unions deal 
only with members but operate without any membership bond as such. 

21 . If, as the Committee believes, the only real bond among the members 
of a large credit union is the bond resulting from membership of the same 
credit union and if the main purpose today of the membership bond is 
to ensure the stability of a credit union by preventing it from expanding 
beyond its managerial capacity which it would otherwise be free to do 
were the field of membership not limited, we see no ideological or practical 

33 



reason for imposing a membership bond requirement upon all credit 
unions. 

22. We do not recommend the deletion of the membership bond require- 
ment from the Act since we consider that in most cases it serves as a 
valuable check on the uncontrolled expansion of credit unions. Indeed, 
many credit unions may well want to continue operating within the field 
of a narrower membership bond requirement and should not be prevented 
from doing so. The Committee considers and recommends, however, 
that where a credit union has attained a certain size and is operating to 
the satisfaction of the Director, with a field of membership so wide as to 
render the membership bond of no real significance, such credit union 
should be permitted to apply for the elimination from its by-laws of a 
formal requirement of a membership bond and be authorized by the 
Director to draw its members from such areas as it considers it can con- 
veniently serve and not merely from within its territorial boundaries, 
however wide. This we consider would enable credit unions to provide 
improved and more varied services and by removing any fixed tie to a 
particular community would enable such a credit union to expand freely 
and on an equal basis with other financial institutions which may well be 
essential to the future development of the credit union movement and for 
its stability. The credit union, which is a co-operative, would thus be per- 
mitted to operate on the co-operative principle of open membership 
based on a similarity of needs of the members. 

23. Credit unions should not be permitted to incorporate without a 
membership bond requirement. This privilege should be restricted on a 
revocable basis to those credit unions which have established to the satis- 
faction of the Director their ability to cater to a larger membership. There 
should also be imposed upon such "open bond" credit unions certain addi- 
tional safeguards in recognition of their different status and added re- 
sponsibilities in serving an unlimited community. In our view such controls 
should include but not be limited to additional audit requirements, closer 
supervision and perhaps a different statutory liquidity base for savings 
and borrowings. The continued exemption of such credit unions from the 
requirements of The Securities Act might also have to be re-examined. 

24. The Committee envisages and recommends the establishment of two 
tiers of credit unions, those operating with and those permitted to operate 
without a membership bond, but both being required to deal only with 
their members which we view as the essential distinguishing feature of a 
credit union. 13 

25. The recommendations of the Committee with respect to the broad- 
ening of the membership bond are closely allied with its recommendations 

34 



concerning the financial stability of credit unions contained in Chapters 
23, 24, 25, 26 and 27 and are dependent upon those recommendations 
being implemented as necessary safeguards. 



1. The Co-operative Syndicates Act, S.Q., 1906, c.33, section 1, provided that "the 
by-laws shall define the limits of the territory within which the association shall 
operate and which shall, in no case, exceed the limits of a provincial electoral 
district." 

The Savings and Credit Unions Act, R.S.Q. 1964, c.293, section 7, as amended» 
which currently governs caisses populaires and credit unions, provides as follows: 
"the territory described in the founding memorandum shall not, without the 
authorization of the Minister of Financial Institutions, Companies and Coopera- 
tives exceed the limits of one electoral district or municipality." 

2. The Report of the Royal Commission on Banking and Finance noted at page 161 
that some 500 caisses populaires were located in areas which were not served by 
bank branches. 

3. An account of the origins and development of the Quebec caisse populaire may be 
found in section 1 of the submission, dated June, 1962, of La Federation de Quebec 
des Unions Regionales des Caisses Populaires Desjardins to the Royal Commission 
on Banking and Finance. 

4. "Credit Unions and Caisses Populaires", a working paper, dated November, 1962, 
prepared by Gilles Mercure for the Royal Commission on Banking and Finance, 
page 25. 

5. Ibid., page 22. 

6. Over 75% of credit unions in the United States are organized with a common bond 
of occupation or association. International Credit Union Yearbook 1969, page 9. 

7. The Co-operative Credit Societies Act, S.O. 1922, c.64, section 26. 

8. Summary of Business prepared by the Credit Union Section of the Registration and 
Examination Branch of the Department of Financial and Commercial Affairs, 1968. 

9. Saskatchewan ". . . the membership ef a credit union shall be limited to groups of 
persons having a common bond of occupation or association, or to groups within a 
well-defined neighbourhood, community, or rural or urban district". Saskatchewan 
Act, section 39. 

Alberta ". . . the membership of a credit union shall be limited to groups of persons 
having a common bond of occupation or association, or to persons within a well- 
defined neighbourhood, community, or rural or urban district". Alberta Act, 
section 48. 

Manitoba ". . . society membership shall be limited to groups of persons having a 
common bond of occupation or association, or to groups within the same neighbor- 
hood, community, or district". Manitoba Act, section 42(3). 

In the latest draft of the proposed new Manitoba Credit Unions Act, the member- 
ship bond provision has been elaborated and perhaps widened. For those credit 
unions required to operate with a membership bond, the draft Act provides that: 
"Credit unions membership . . . shall be limited to groups having a common bond 
of occupation or association, or to the residents within a well defined neighbour- 
hood, community or rural or urban district, including a rural trading area, 
employees of a common employer or members of a bona fide fraternal, religious, 
co-operative, labour, rural, educational or similar organization, and members of the 
immediate family of such persons". Proposed Manitoba Credit Unions Act, 
draft 4, dated September, 1969, section 30(5). 

British Columbia ". . . Admission to membership in a credit union shall be limited 
to persons coming within any of the following classes; that is, persons 

(a) having a common bond of occupation; 

(b) having a common bond of association; 

(c) residing or working within an identifiable neighbourhood or community; 
or 

(d) who are members of another credit union and have been recommended for 
membership in writing by that credit union; and such other classes of 
persons as are defined in the common bond approved by the Inspector of 
Credit Unions". British Columbia Act, section 21. 

35 



10. Statistics derived from Annual Reports of the provincial authorities of the relevant 
provinces indicate the following distribution of credit unions classified according 
to occupational and community membership bonds as at December 31, 1968. 

Total active credit unions Occupational Community 
Alberta 269 67 129 

British Columbia 256 102 116 

Manitoba 239 69 115 

Ontario 1650 986 189 

Saskatchewan 284 27 241 

11. Revised Standard By-laws, 1966, article II, clause 5. 

12. See generally, Proceedings of the 15th Interprovincial Conference of the National 
Association of Administrators of Co-operative Legislation, 1968, pages 28-30. 

13. No provincial Act has yet permitted by its express terms the establishment of 
"open membership" credit unions. Draft 4 of the proposed Manitoba Credit 
Unions Act, Part III, would permit credit unions which satisfy certain conditions 
to operate without a membership bond. 



36 



CHAPTER 9 
Branches 

1. Closely allied to the Departmental policy of limiting the potential 
size of community credit unions is the reluctance of the Department to 
permit credit unions to conduct branch operations. The Act is silent on 
the right of a credit union to establish branches and, although it might be 
argued that this is a right reasonably incidental to the operations of a 
credit union, the present administrative policy in Ontario does not per- 
mit credit unions to open branch offices. The legislation in certain other 
provinces is also silent on the right of credit unions to establish branches, 
but in most of these provinces branch offices are in general use. 

2. Although the Department does not permit credit unions to operate 
branches, it has authorized certain credit unions to operate so-called col- 
lection points. Originally the basic distinction between a branch and a 
collection point was that a collection point was an outlet only for receipt 
of deposits and staffed by a credit union collector, whereas a branch office 
offered in addition all other facilities and services of a particular credit 
union. This distinction has become blurred because the Department now 
accepts that a collection point can also provide other credit union services, 
including withdrawal facilities, provided that all the accounting of a 
credit union is carried out at the head office and separate accounts are not 
kept by the collection point. So long as no separate accounts are kept, 
the Department does not consider the so-called collection point as a 
branch. 

3. Apart from the question of accounting, there seems to be little dif- 
ference between a collection point in its operations and a branch. If, as 
the Committee has recommended, section 8 of the Act and its interpre- 
tation are broadened to permit community credit unions of a larger size, 
it necessarily follows that such credit unions, to offer complete and 
convenient service to members, must be permitted to open branches. 
Any accounting requirements and procedures which the Department feels 
necessary in connection with the establishment and operation of a branch 
could be detailed in Regulations to the Act. 

4. The Committee recommends that the Act contain a provision per- 
mitting credit unions to open and operate branches, subject to such 
conditions as may be prescribed by Regulations. 



37 



CHAPTER 10 
Mergers 

1 . In Chapter 8 the Committee noted the limitations on the opportunities 
for mergers between credit unions resulting from the current restrictive 
administrative interpretation of the membership bond provisions. If the 
recommendations of the Committee in Chapter 8 are implemented the 
result should be to facilitate mergers between credit unions thereby 
eliminating any present criticism of the restrictive policy toward mergers. 
There remain for consideration the procedures available under the Act for 
effecting mergers between credit unions. 

2. Mergers between credit unions may be effected under the Act either 
by amalgamation or by sale and purchase of assets. 

3. The Act provides in section 56 that any two or more credit unions 
may amalgamate and continue as one credit union. The procedure for 
amalgamation under section 56 is very similar to that presently provided 
under section 96 of The Corporations Act. The amalgamation agreement 
must be approved by two-thirds of the members present and voting at a 
general meeting of each of the credit unions involved and submitted to 
the Minister for his discretionary approval and the issue of a certificate of 
amalgamation. There is no requirement that the amalgamation agreement, 
prior to its adoption by the members, be approved by or even submitted 
to the Minister or the Director or supervisor. Until the recent amendment 
to the Act vesting in the Minister of Financial and Commercial Affairs 
the functions of the Provincial Secretary with respect to credit unions it 
would have been technically possible for credit unions to amalgamate 
without reference to the Department, and it is perhaps for this reason 
that the Committee is advised that as a matter of Departmental practice 
mergers between credit unions could be carried out only by means of 
sale and purchase of assets pursuant to provisions of section 57 of the Act. 

4. Under section 57 the proposed agreement for the purchase and sale 
of assets must be submitted to and approved by the Director before it can 
be presented to the members of the credit unions concerned for their 
approval. If the approval of the Director is obtained the sale and purchase 
agreement must thereupon be approved by three-quarters of the members 
present and voting at a general meeting of each of the credit unions 
concerned. 

5. In the view of this Committee the present statutory procedures govern- 
ing the merger of credit unions and the administrative limitations imposed 
upon the methods for carrying out mergers are unsatisfactory. It is unde- 

38 



sirable in principle and unsupportable in law that credit unions wishing to 
merge by amalgamation should be prevented from doing so by an extra- 
legal prohibition imposed by the Department in the face of an express 
procedure contained in the Act for the amalgamation of credit unions 
and be required to effect the proposed merger by sale and purchase of 
assets. But it is also undesirable that the alternative procedures in the Act 
for the effecting of mergers between credit unions should be so widely diver- 
gent in their requirements. In particular the Act should not afford a means 
to credit unions to by-pass completely the Director who is charged with 
the administration of the Act, especially as mergers between credit unions 
almost always necessitate the enlargement of the membership bond so 
that the resulting credit union may accommodate the members of the 
merging credit unions. 

6. Accordingly the Committee recommends that while a credit union 
should be free to select the method of accomplishing a merger it deems 
most convenient, there should in every case be a requirement that the 
merger agreement be approved by the Director. Since this is presently 
required only in mergers by means of sale and purchase of assets, the 
Committee recommends that section 56 be amended to provide as in 
most provincial legislation that the proposed amalgamation agreement be 
approved by the Director before its submission to the members in general 
meeting. The Committee also recommends that the vote of members re- 
quired to approve an agreement for the sale of assets be reduced to a 
two-thirds majority of members present and voting at the meeting, which 
is the vote required for the adoption of an amalgamation agreement. 



39 



CHAPTER 11 

Membership 

Minors 

1 . Minors of any age are eligible for membership in a credit union in 
Ontario, but are ineligible to hold office in the credit union. 1 In contrast 
with most provincial Acts, however, minors who are admitted to mem- 
bership of a credit union in Ontario possess equal voting rights with 
other members but cannot borrow in excess of their savings unless secured 
by a promissory note signed by a competent adult who is jointly and 
severally liable on the loan. The provisions governing the admission and 
membership rights of minors are found in section 25 of the Act which reads 
as follows : 

"Subject to the by-laws, a person under the age of twenty-one years 
may be a member of a credit union, and every such person may enjoy 
all the rights of a member and execute all instruments and give all 
acquittances necessary to be executed or given under the by-laws, 
but shall not be a trustee, manager, treasurer or a member of the 
board of directors, credit committee or supervisory committee of the 
credit union and does not have the right to borrow any amount in 
excess of his savings in the credit union except upon a joint and 
several promissory note signed by him and by a person over twenty-one 
years of age." 

The Revised Standard By-laws do not qualify or enlarge upon the mem- 
bership rights of minors and provide that "Subject to the provisions of 
Section 25 of the Act a person under the age of twenty-one years may be 
admitted as a member of the credit union in the same manner as persons 
over the age of twenty-one years may be admitted." 

2. Some provincial Acts for the purpose of membership rights of minors 
distinguish between minors under 16 years and those between 16 and 
21. 2 Members under 16 years are junior or auxiliary members who may 
not vote. In Quebec it would appear that a minor of any age cannot vote. 3 
Having regard to the basic principle of one vote per member regardless 
of the number of shares held and the incapacity of very young members 
to exercise an intelligent choice, there is perhaps a possibility that a parent 
member who opens a share account for very young children could, in 
effect, gain additional voting rights. The Committee, therefore, recom- 
mends that minors under 16 years should have no right to vote. 

3. In several provincial Acts no prohibition is placed upon the making 
of loans to minors although a restriction can reasonably be inferred in 
the case of young members in the discretion of the credit committee or 

40 



the loan officer in approving loan applications. In such provinces a credit 
union is free to determine by by-law or otherwise its policy relating to 
loans to minors. In Ontario, however, the position is somewhat exceptional 
and illogical, since the Act grants unqualified voting rights to minors of 
any age, but prohibits loans to all minors in excess of their savings without 
the joint and several guarantee of a competent person. The joint and several 
promissory note of a competent adult may not be necessary in order to 
recover money borrowed by a minor since the general law which renders 
loans of money to persons under 21 void may have been effectively super- 
seded by section 27(1) of the Act which provides as follows: 

"All moneys payable by a member to a credit union are a debt due 
from the member to the credit union and are recoverable as such in a 
court of competent jurisdiction." 

The Ontario Law Reform Commission in its Report on the Age of 
Majority and Related Matters recommended that the age of majority be 
lowered to 18 years and that section 25 of the Act be amended accordingly. 
The Committee agrees with this recommendation but feels that further 
rights should be afforded to minors with respect to borrowing. In the view 
of the Committee, the right to borrow should, in principle, be concomitant 
with the right to vote and, since the Committee recommends that minors 
of 16 years and over be entitled to vote, the Committee recommends that 
a credit union be permitted to make loans to minors 16 years and over in 
excess of their savings and without the added requirement of a promissory 
note signed by a competent person. The ability of a minor to borrow should 
be determined as a matter of credit assessment. If a particular credit union 
wishes to restrict this right it should be permitted to do so by by-law. 

4. The present requirement under section 25 of the Act to the effect that 
officers, directors and members of the credit committee and supervisory 
committee be members 21 years and over should be relaxed since some 
credit unions may consider it desirable to encourage younger members to 
participate in the administration of credit union affairs even though it 
may be unlikely that minors would be elected to office in many credit 
unions. The Committee therefore recommends, consistent with the recom- 
mendations of the Ontario Law Reform Commission, that minors 18 years 
and over be eligible for election as directors and members of the credit or 
supervisory committee and to hold office in a credit union. In view of 
possible difficulties arising from the general law concerning the enforce- 
ability of contracts made with minors, the Committee recommends that a 
section be included in the Act that, where a director, officer or member of 
a credit committee or supervisory committee under the age of 21 years 
contracts on behalf of the credit union, he shall be deemed to possess the 
contractual capacity of a person sui juris. 

5. The status of a credit union with respect to a deposit or chequing 
account of a minor is not dealt with in the Act and it would appear to 

41 



the Committee desirable if the Act included a section similar to section 93 
of The Loan and Trust Corporations Act. 3 

6. The Committee recommends that : 

(a) a minor under the age of 16 should not be entitled to vote; 

(b) a credit union should be permitted to loan money to a minor 16 
years of age and over in excess of his shares and deposits and 
without a promissory note signed by an adult, subject to the by- 
laws of the credit union ; 

(c) minors of the age of 18 years and over be eligible to be elected 
directors and members of the credit committee or supervisory com- 
mittee and to hold office in a credit union ; and 

(d) a section be added to the Act similar to section 93 of The Loan and 
Trust Corporations Act. 



1. Section 25. 

2. e.g. British Columbia, Saskatchewan, New Brunswick. 

3. Quebec Act, section 22. 

4. Section 93 of The Loan and Trust Corporations Act, R.S.0. 1960, c.222, provides: 

"A person not of the full age of twenty-one years may deposit money with a 
registered corporation in his own name, and the money so deposited may be 
repaid to him, and he may give a valid discharge therefor, notwithstanding his 
minority." 

42 



CHAPTER 12 

Membership 

Corporations and Unincorporated Associations 

1. While it is difficult to visualize a corporation or an unincorporated 
association as a member of a credit union in view of the membership bond 
requirements, except perhaps in a credit union with a community bond or 
to a lesser extent in a credit union organized with a membership bond of 
common association, the Act has always recognized the right of a cor- 
poration to be a member of a credit union. Prior to an amendment in 
1969, the Act contained no restrictions on the right of corporate member- 
ship since section 23, prior to amendment, provided "any corporation 
may become a member of a credit union". A Departmental ruling, how- 
ever, imposed the restriction that 51% of the voting shares of the corpora- 
tion be registered in the names of members of the credit union in order 
to render the corporation eligible for membership. This Departmental 
ruling was embodied as an amendment to the Act in 1969 which now 
provides with respect to corporate membership, 

"Section 23(1). A corporation may become a member of a credit union 
where, 

(a) in a case of a corporation having share capital the persons holding 
equity shares carrying at least 51% of the voting rights attached 
to all equity shares of the corporation for a time being outstanding 
are members of that credit union; 

(b) in the case of a corporation without share capital, at least 51% of 
the members of the corporation are members of that credit union." 

Despite the restrictions in the above quoted section, there would still 
appear to be a lacuna in the provision governing the admission of corporate 
members with share capital, since section 23 requires that only 51% of 
the voting shares be held by members of the credit union. Apart from 
the possibility that the beneficial owners of such shares may not be mem- 
bers of the credit union, a corporation would apparently be eligible for 
membership if one shareholder who was a member of the credit union 
held 51% of the voting shares registered in his name while the remaining 
49% of the voting shares were widely distributed among shareholders 
who were not members of the credit union. 

2. The Act is silent upon the eligibility for membership of unincorporated 
associations in a credit union except by an indirect reference in section 
24 which allows agricultural associations, municipal bodies and school 
boards to vote by proxy. However, the Committee is advised that the 

43 



Department does permit unincorporated associations, a majority of the 
members of which are members of a credit union, to join that credit union. 
There appears to be no essential difference in principle between member- 
ship by a corporation and membership by an unincorporated association 
and it is recommended that the Act specifically provide that an unincor- 
porated association may become a member of a credit union. 

3. The limitation on the right of corporations and unincorporated asso- 
ciations to membership in a credit union is a matter of some concern. If, 
as the Committee has recommended (Chapter 8), credit unions be allowed 
to operate with an unlimited membership bond, there should and need be 
no restrictions on the right of a corporation or unincorporated association 
to become members. However, restrictions would appear to be required 
in the case of credit unions which will continue to operate with a member- 
ship bond so as to ensure that the membership bond of the particular 
credit union is shared to some extent at least by the members of the 
corporation or unincorporated association. The present provisions of the 
Act relating to the conditions for the membership of corporations are not 
applicable to unincorporated associations and in the view of the Committee 
a better test, which would be applicable equally to corporations and un- 
incorporated associations, is one based on the composition of the 
membership of the corporation or unincorporated association. Any restric- 
tion of this kind is bound to be arbitrary and probably imprecise, but 
the Committee recommends the adoption of a provision similar to that 
in the Manitoba Act, to provide that in the case of a credit union with a 
membership bond, corporations and unincorporated associations may 
become members provided that the shareholders or members, as the 
case may be, are for the most part composed of the same general group 
as the members of the credit union. 

4. Under section 23(2) of the Act, loans to corporations are made subject 
to special procedural requirements : 

"A credit union shall not make a loan to a member that is a cor- 
poration unless the loan is approved by a joint meeting of the board 
of directors, the credit committee and the supervisory committee of 
the credit union." 

No similar provision exists with respect to loans by a credit union to an 
unincorporated association, but we are advised that the Department 
prohibits such members from borrowing from the credit union. The pro- 
visions of the Revised Standard By-laws which deal with the maximum 
amount of any loan and the minimum security required do not distinguish 
between individuals, corporations or unincorporated associations, but 
refer only to members and might be interpreted as authorizing loans to 
unincorporated associations. The Committee is of the opinion that, if 
the Act is amended to recognize the right of an unincorporated association 

44 



to become a member, such an association should be given the right to 
borrow subject to the same conditions as those which exist for corporations. 

5. Since the Committee feels that member corporations and unincorpo- 
rated associations be subject to identical requirements with regard to 
borrowing from a credit union, the question arises as to what requirements, 
if any, additional to those now provided should be imposed upon loans 
to member corporations or unincorporated associations. There is little 
uniformity among provincial Acts with regard to loans to member corpo- 
rations and unincorporated associations. The provisions range from a 
blanket prohibition upon all such loans without the approval of the 
governmental authority to restrictions upon the amount a credit union 
may lend to a member corporation or unincorporated association and/or 
a special procedure for approving such loans. The Committee is of the 
view that the policy with regard to making loans to member corporations 
and unincorporated associations should not be governed by legislation 
but should be left to the discretion of each credit union. The present 
restriction in section 23 with respect to loans to corporations would 
appear to be satisfactory and should be extended to loans to unincorpo- 
rated associations. In addition, the Act should specifically provide, that if 
any member of the board or the credit or supervisory committee is a 
director, officer, shareholder or member of the corporation or unincor- 
porated association seeking the loan, he disclose his interest and refrain 
from voting. 

6. The Committee recommends that: 

(a) in the case of a credit union operating with a membership bond, 
corporations and unincorporated associations be eligible for membership 
provided that the shareholders or members thereof are for the most part 
composed of the same general group as the members of the credit union; 

(b) in the case of a credit union which may in the future be permitted to 
operate without a membership bond, there should be no restrictions on 
the right of corporations and unincorporated associations to be members; 
and 

(c) credit unions be empowered to make loans to both member corpor- 
ations and unincorporated associations, but that loans to such members 
be approved by a disinterested majority of the board of directors, credit 
committee and supervisory committee meeting jointly. 



45 



CHAPTER 13 

Internal Administration 

General 

1. As originally conceived, the management of a credit union was 
divided among a board of directors, a credit committee and a super- 
visory committee which were to be separate, independent, autonomous 
bodies elected by the membership with defined powers and duties demar- 
cated by a series of checks and balances so as to prevent any overlapping 
or usurpation of functions. This separation of powers and duties in the 
tripartite management structure can perhaps best be illustrated in the 
context of the typical lending transaction which may be divided into three 
stages. The board of directors determines the general lending policy of 
the credit union subject to the by-laws and the Act including such matters 
as the amount available for loans, the rate of interest to be charged and 
the general requirements regarding the permissible types of loan security. 
The credit committee considers individual loan applications from members 
determining in each instance whether to make the particular loan and if 
so on what conditions and with what security, if any. The supervisory 
committee in the course of its duty to exercise surveillance over the 
financial affairs of the credit union and to make regular examinations 
and audits of the credit union books, ensures that the board in its lending 
policy does not contravene the Act or by-laws and that each individual 
loan granted by the credit committee conforms to the lending policy laid 
down by the board and, in the case of secured loans, that the agreed 
security has in fact been taken. So long as a credit union remained a small, 
relatively unsophisticated financial institution, the tripartite committee 
structure worked reasonably well and perhaps had the added advantage 
of actively involving a number of the members in the administration of 
credit union affairs. The growth and development of the credit union 
movement in Ontario and elsewhere and the consequent need to enable 
credit unions to adopt a managerial structure better suited to meet the 
exigencies of competition is reflected in the gradual but continuing erosion 
and, in some larger credit unions, the elimination of the traditional 
committee structure and its replacement by a board of directors with 
increased powers assisted by qualified professional management appointed 
from outside the membership to perform some or all of the functions 
formerly entrusted to the credit committee or supervisory committee. 

2. The Committee considers that its recommendations with respect to 
the membership bond, which hopefully will encourage the growth and 
consolidation of the credit union movement, will inevitably accelerate the 
trend towards professionally managed credit unions. However, the Com- 

46 



mittee is conscious of the need to preserve, as far as possible, the demo- 
cratic traditions and opportunities for participation of the members in 
the management of credit unions which are perhaps placed in question 
when the members' committees are replaced by professional management 
and the powers originally divided between the board of directors and two 
committees end up being exercised by the board of directors aided by 
officers and employees generally appointed by and responsible to the 
board of directors. In addition to specific amendments with regard to the 
provisions governing the board of directors, the supervisory committee 
and the credit committee, it therefore seemed appropriate to this Com- 
mittee to recommend that the Act be supplemented by additional statutory 
rights accorded to members. These matters are examined in Chapters 14, 
15, 16, 17 and 18. 



47 



CHAPTER 14 

Internal Administration 

Directors and Officers 

1. The board of directors, which under the Act must number "at least 
five", 1 is the policy making body of the credit union. Section 30(2) of the 
Act prescribes the functions of the board as follows : 

"The board of directors shall perform such duties as are prescribed 
by this Act, the regulations, and the by-laws of the credit union." 

The specific duties conferred upon the board of directors in the Act 
generally arise where some or all of the functions of the credit committee 
and the supervisory committee are reassigned to the board of directors 
upon the appointment of a loan officer or an auditor and these are con- 
sidered separately under the recommendations of this Committee concern- 
ing the credit committee and the supervisory committee (Chapters 1 5 and 
16). The single Regulation to the Act presently in force does not in any 
way relate to the powers and duties of the board of directors. The basic 
duties and functions of the board of directors are set out in Article VII of 
the Revised Standard By-laws as follows : 

"Subject to these by-laws the Board of Directors shall manage the 
affairs of the credit union and it shall be more particularly their duty to: 

(a) act upon all applications for membership and the expulsion and 
withdrawal of members. 

(b) fix the amount of the bond which shall be required of any officer 
having the custody of funds. 

(c) determine, from time to time, interest rates and fix the maximum 
number of shares which may be held by and the maximum amount 
which may be deposited by any member of the credit union. 

(d) recommend to the annual meeting the payment of dividends and 
when deemed advisable to recommend the partial refunding of 
moneys received as interest on loans. 

(e) have charge of investments other than loans to members. 

(f) recommend amendments to the by-laws. 

(g) designated the bank, Province of Ontario Savings Office, Ontario 
Co-operative Credit Society or Trust Company licensed to carry 
on business in Ontario in which the funds of the credit union shall 

48 



be deposited and designate the person or persons who may sign 
and countersign cheques on behalf of the credit union. 

(h) employ, fix the compensation and prescribe the duties of such 
employees as may, in the discretion of the Board of Directors, be 
necessary. 

(i) act upon any application of a member for the postponement of 
any payment or payments on a loan. 

(j) perform all duties and take all precautions necessary for the 
interest of the credit union not within the jurisdiction of the 
general meeting and not inconsistent with the Act, the regulations 
and these by-laws and perform such other duties as the members 
may from time to time designate." 

2. The board of directors presently has power to determine the interest 
rate payable on deposits by the credit union but is limited to making a 
recommendation only regarding the amount of any dividend and rebate 
of interest. Section 44 of the Act vests in the members the right to declare 
a dividend upon the recommendation of the board, but the Act is silent on 
the right of the members to declare a rebate of interest, although in practice 
rebates are declared at the annual meeting. A submission was received 
proposing that in Ontario the power to declare dividends and rebates of 
interest should be vested in the board of directors. Despite technical and 
legal differences between a dividend on shares and interest on deposits 
within the particular context of a credit union, both are regarded essentially 
as returns on the savings of members, the amount of which would appear to 
be properly a question to be decided by the board of directors. The Com- 
mittee is of the view that it is therefore preferable to vest in the board 
of directors the power to determine and declare dividends on shares and 
rebates of loan interest. In addition, the Act should provide specifically 
for the right of a credit union to rebate loan interest. 

3. Directors of credit unions are elected by the members in general 
meeting. Pursuant to the provisions of section 30(3) of the Act, the Revised 
Standard By-laws provide for the election and retirement of directors in 
rotation, the effect of which is that a director holds office for three years, 
the maximum term permitted. Once elected, there is no means under the 
Act for the removal of a director by the members before the expiration of 
his term of office apart from the one exceptional instance under section 
32(9) where the members in general meeting may vote by a two-thirds 
majority to dismiss a director who has been suspended from office by the 
supervisory committee because of a misappropriation or misdirection of 

49 



credit union assets. There is in addition a power under section 30(7) of the 
Act enabling the board of directors to remove a fellow director who "fails 
to attend three consecutive meetings of the board without, in the opinion 
of the board, having a reasonable cause therefor or fails to perform any 
of the duties allotted to him as a member of the board". 

4. The growth in size and in complexity of credit unions in Ontario has 
fostered an increasing need to rely on expert professional assistance and has 
led to an inevitable increase in the power and responsibility of the board of 
directors. It appeared to the Committee that the introduction of a general 
power to remove directors from office at any time would go some way to 
compensate for the consequent loss of member participation and of the 
democratic structure of credit unions by the continuing erosion of the 
tripartite structure of management and its replacement by professional 
assistants appointed by and responsible to the board of directors. Insofai 
as can be ascertained, only one provincial Act empowers the members in 
general meeting to remove a director before the expiration of his term oi 
office. 2 

5. In its earlier Interim Report, this Committee recommended that the 
shareholders of a company have an unrestricted power to remove any 
director at any time by ordinary resolution in general meeting, and it 
appeared to this Committee that the considerations which led to its 
recommendation for the business corporation apply equally to credit 
unions. 3 The Committee recommends, therefore, that the members of a 
credit union be empowered to remove any director before the expiration 
of his term of office by ordinary resolution passed at a general meeting of 
the credit union. The notice of such meeting should specifically refer to the 
proposal to remove the director concerned to enable him to make such 
representations to the members regarding the resolution for his removal as 
he thinks fit. 

6. The power of the members to remove a director (and as recommended in 
Chapters 15 and 16 a member of the credit committe or supervisory com- 
mittee) by ordinary resolution at a general meeting depends for its effective- 
ness upon the ability of the members to ensure that such meeting will be 
convened. Section 48 of the Act provides that the Director may, upon 
the application of one-tenth of the members (or 100 where the membership 
exceeds 1000), call a special meeting of the credit union or direct the 
supervisor to conduct an examination of its affairs. The Committee 
concluded that the present provisions are unsatisfactory since there 
is currently no right in the membership to convene a special meeting of 
the credit union ; should the Director accede to a request to call a special 
meeting he may require security for costs, and the requisitioning members 
will be reimbursed by the credit union only if the Director so directs. The 

50 



Committee recommends that a minimum of 5% of the members or 50 
members, whichever is less, of a credit union be empowered to requisition 
the board of directors to convene a general meeting of the credit union for 
any purpose connected with the affairs of the credit union, not inconsistent 
with the Act, including the removal of a director, a member of the credit 
committee or supervisory committee. The board should be required to 
convene such meeting within 21 days after receipt of the written requisition 
of the members but should it fail or refuse to do so, the members should 
be empowered within 60 days to convene a general meeting and be reim- 
bursed any reasonable expenses incurred unless a majority of the members 
at the general meeting vote against reimbursement. 

7. The definition section of the Act defines officers to include "the 
treasurer, secretary, manager, assistant treasurer, assistant secretary, 
assistant manager and any employee who has authority to approve loans" 4 
but not the president or the vice-president despite the fact that the Revised 
Standard By-laws provide for the election of a president and a vice- 
president. The Act, although it does not include president within the 
definition, provides that the president may be a member of the credit 
committee ex officio if the by-laws of a credit union so provide 5 and, 
in connection with the approval of by-laws by the supervisor, "two copies 
thereof, signed ... by the president and the secretary, shall be sent to the 
supervisor". 6 The Committee recommends that the definition section of the 
Act be amended to define officers as meaning president, vice-president, 
treasurer, secretary, manager, assistant treasurer, assistant secretary, 
assistant manager and any employee who has authority to approve loans. 

The Committee recommends that: 

(a) the power to declare dividends and rebates of interest be vested in 
the board of directors; 

(b) the Act should provide specifically for the right of a credit union to 
rebate loan interest; 

(c) a director be subject to removal before the expiration of his term of 
office, by resolution of the members passed at a general meeting of the 
credit union; 

(d) the notice of such meeting should specifically refer to the proposal 
to remove the director to enable him to make such representations to the 
members before and at the meeting as he deems fit; 

(e) 5 ( } of the members or 50 members, whichever is less, be empowered 
to convene a general meeting of the credit union in the manner set out in 

51 



paragraph 6 for any purpose connected with the affairs of the credit union 
not inconsistent with the Act, including the removal of a director or a 
member of the credit committee or supervisory committee; and 

(f) officers be defined in the Act as meaning president, vice-president, 
treasurer, secretary, manager, assistant secretary, assistant manager and 
any employee who has authority to approve loans. 



1. Section 30(1). 

2. Saskatchewan Act, section 33. 

3. Interim Report, 1967, Chapter VIII, Section 3. 

4. Section 1(e). 

5. Section 3 1 ( 1 ) ; see also section 50 (2 ) . 

6. Section 16(1). 



52 



CHAPTER 15 

Internal Administration 

The Credit Committee 

1. Under section 31 of the Act the members at the first general meeting 
are required to elect from their membership a credit committe of "at least 
three members who shall not be members of the board of directors or the 
supervisory committee or officers of the credit union" to hold office for 
such period as the by-laws provide, but if they are elected in rotation their 
maximum term of office is three years. The Committee received no sub- 
missions respecting the election or tenure of the credit committee and our 
own consideration of this matter leads us to recommend no changes in 
the present provisions. 

2. The Act is silent on the duties of the credit committee except to state 
that "it is the duty of the credit committee to consider all applications 
and approve all loans to members". 1 The Revised Standard By-laws do 
not elaborate upon the duties of the credit committee except to provide 
that "no approval of a loan shall be given by the credit committee unless 
a meeting of the credit committee unanimously consents to such approval". 
Unlike the supervisory committee, the credit committee is not obliged to 
submit a report to the annual meeting. 

3. It was submitted to this Committee that the duties of the credit com- 
mittee should be expanded to require all credit committees to keep minutes 
of meetings, to report monthly to the board of directors and to submit a 
written report to the annual meeting of the credit union. The Committee 
recognizes that the credit committee of many credit unions has already 
adopted as its standard procedure the additional duties suggested above, 
but considers that the credit committee of all credit unions should be 
required to operate in such manner. The Committee therefore recommends 
that the credit committee should be required to keep minutes of its meet- 
ings, to submit a written monthly report to the board setting out as a 
minimum the number of loan applications received, loans granted and 
security obtained, if any, and to submit a written report to the annual 
meeting of the credit union. 

4. The Act permits the credit committee to delegate the power to make 
loans, but the restrictions upon such delegation are such as severely limit 
its utility. Section 31(7) of the Act provides: 

"The credit committee may upon such terms as it determines, 

(a) authorize the treasurer or manager, without obtaining its approval, 
to make loans in amounts not exceeding the shares and deposits 
of the borrower less any debts owing by him to the credit union; or 

53 



(b) authorize the treasurer, manager or other person, without ob- 
taining its approval, to make loans in amounts not exceeding $100 
for periods not exceeding three months." 

The Committee considers that the above provision is too restrictive par- 
ticularly in the light of other provincial legislation which does not generally 
distinguish between the independent authority of the treasurer or manager 
and any "other person" if all are acting as delegates of the credit com- 
mittee. The Committee recommends that the section be amended to permit 
the credit committee acting by majority to authorize the treasurer, manager 
or other person to make loans to a maximum of the net savings of the 
member in the credit union plus such additional amount as is fully secured 
by the market value of Government of Canada or provincial bonds 
pledged as security or such additional amount as may be prescribed by 
Regulation where the loan is unsecured. 

5. Although the provisions respecting the election and composition of 
the credit committee would appear at first sight to conform to the original 
idea of separate and independent membership, the rigid demarcation 
between the credit committee and the board of directors has been eroded 
in several respects. If the by-laws so provide, the president who is elected 
by the board from among its members may be a member of the credit 
committee ex officio. Vacancies occurring in the credit committee are filled 
by the board until the next annual meeting rather than by the credit 
committee. Similar provisions exist in other provincial Acts and perhaps 
the dilution of the principle of separate and independent membership is 
less in Ontario than in most other provinces. In Saskatchewan, for example, 
the board of directors appoint the whole of the credit committee and are 
themselves eligible for membership. 2 In New Brunswick, directors are 
eligible for election to the credit committee by the members but may not 
constitute a majority of the credit committee. 3 Only in Quebec and 
Manitoba does the legislation prohibit any member of the board of direc- 
tors, the supervisory committee or any officer from serving on the credit 
committee. 4 

6. Of greater importance is the provision in section 31(8) of the Act 
whereby a credit union may, by by-law, authorize the board of directors 
to appoint one or more employees to perform all or some of the functions 
of the credit committee. A person so appointed is usually known as a loan 
officer. There are currently two by-laws for this purpose which the super- 
visor will approve. One by-law provides that the loan officer performs all 
of the duties of the credit committee which, being stripped of its functions, 
is generally not thereafter elected or if elected acts only in an advisory 
capacity. The other by-law provides that the loan officer has power to 
approve loans only up to a certain amount, with the approval of the 
credit committee required for loans in excess of the stated amount. A 
number of credit unions have enacted the by-law which, in effect, vests 

54 



all of the powers of the credit committee in a loan officer. In the case of 
larger credit unions, where there is a large demand for loans, it would 
appear that the credit committee may not be able to function effectively 
due to sheer volume and the interests of such credit unions are better 
served by professionally trained loan officers. If a loan officer is appointed 
with authority to approve all loans and not merely loans to a stated 
amount, there appears to be little point in requiring the credit union to 
elect a credit committee, which would serve little or no purpose. The 
Committee concluded that the present provisions with respect to the 
appointment of loan officers are satisfactory and recommends no change. 
It should be open to a credit union to appoint a loan officer with unlimited 
or limited power to approve loans and in the former case to dispense 
with the credit committee. 

7. A recent amendment to the Act 5 prohibits credit unions from ap- 
pointing the secretary, the treasurer, or manager of the credit union or 
his assistant as loan officers apparently on the basis that by preventing 
the officer or person normally entrusted by the board of directors with 
the power to disburse moneys of the credit union from authorizing a 
loan would protect the members against possible fraud. It was submitted 
to this Committee that this provision, which was enacted in 1966, has not 
worked well since it has prevented qualified persons from being in the 
position where they are needed most. The Committee considers that on 
balance the benefits of appointing as loan officer a person already con- 
versant with the affairs of the credit union and the possible savings to a 
small credit union by such an appointment outweigh any risks of losses 
resulting from a fictitious loan "approved" by the loan officer and "made" 
in his dual capacity as secretary, treasurer or manager, which would in 
any case be diminished by proper bonding of the person concerned. The 
Committee accordingly recommends that section 31 (8a) be deleted. 

8. The Committee noted that for a reason not immediately discernible 
from the Act itself, there appears to be an unwarranted discrepancy in 
the provisions governing the credit committee and the supervisory com- 
mittee. The Act provides that, if a member of the credit committee fails 
to attend three consecutive meetings of the committee without, in the 
opinion of the board of directors, having a reasonable cause therefor or 
fails to perform any of the duties allotted to him as a member of the com- 
mittee, his position on the committee may be declared vacant by the board 
of directors. 6 However in the case of the similar provision dealing with the 
removal of members of the supervisory committee, the members of that 
committee and not the board of directors are given the right to declare the 
position vacant. 7 The Committee is of the opinion that the procedure in the 
case of each committee should be the same and that the members of the 
credit committee rather than the board of directors should have the right 
to declare vacancies in the circumstances set out in section 31(5). It should 

55 



also be the function of the credit committee and not the board of directors 
to determine if the circumstances exist which give rise to the right to declare 
a vacancy under section 31(5). The board of directors is responsible for 
filling casual vacancies on the credit committee until the next annual 
meeting whereas, in the case of the supervisory committee, a casual 
vacancy is filled by the remaining members of that committee. The Com- 
mittee recommends that the power to fill vacancies on the credit committee 
between annual meetings be vested in the credit committee rather than in 
the board of directors. The Committee also recommends that the Act 
provide that the members of a credit union have the right to remove a 
member of the credit committee by ordinary resolution passed at a general 
meeting, subject to the same procedural requirements as those recom- 
mended by the Committee in the case of the removal of a director. 
9. The Committee recommends that : 

(a) the credit committee be required to keep minutes of its meetings, 
to submit monthly reports to the board of directors concerning 
loan applications, loans approved and security taken, and to sub- 
mit a written report to the annual meeting of the credit union; 

(b) the credit committee be empowered to delegate to the treasurer, 
manager or other person the independent power to approve loans 
not exceeding a member's shares and deposits, plus such amounts 
as are fully secured by the market value of Government of Canada 
or provincial bonds pledged as security, and unsecured loans up 
to a maximum amount prescribed by Regulation; 

(c) a credit union be empowered to appoint as loan officer, the sec- 
retary, treasurer or manager of a credit union or his assistant and 
that for this purpose section 31 (8a) of the Act be repealed; 

(d) the credit committee and not the board of directors should have the 
right to determine if the circumstances exist which give rise to the 
right to declare a vacancy on the credit committee under section 
31(5) and the credit committee and not the board of directors 
should be empowered to declare the vacancy under that section ; 

(e) casual vacancies on the credit committee be filled by the remaining 
members of the credit committee and not by the board of directors 
as the Act presently provides ; and 

(f) the members of the credit committee be subject to removal by 
resolution of the members in general meeting subject to the same 
procedural requirements recommended for the removal of direc- 
tors of a credit union in Chapter 14. 

1. Section 31(6). 

2. Saskatchewan Act, section 31. 

3. New Brunswick Act, section 11(4). 

4. Quebec Act, section 60; Manitoba Act, section 59. 

5. Section 31 (8a), enacted in 1966. 

6. Section 31 (5). 

7. Section 32 (6). 

56 



CHAPTER 16 

Internal Administration 

The Supervisory Committee 

1. The Act requires that every credit union at its first general meeting 
elect from among its members "a supervisory committee of three mem- 
bers". 1 In common with the majority of provincial Acts, the members of 
the supervisory committee may not be directors, members of the credit 
committee or officers. Like the credit committee, the members of the 
supervisory committee may hold office for such period as is prescribed in 
the by-laws of the particular credit union and if elections are subject to 
rotation the maximum term is three years. The Act requires that the 
credit committee consist of at least three members and the board of 
directors of at least five members and there seems to be no valid reason 
for restricting the size of the supervisory committee to three if the mem- 
bers wish to elect a larger supervisory committee and members are avail- 
able to serve. Moreover, the limitation to three members can constitute 
a serious disadvantage to larger credit unions in view of the growing 
complexity of credit union finances resulting in increased responsibilities 
which cannot presently be shared among more than three persons. The 
Committee accordingly recommends that section 32(1) of the Act be 
amended to require the supervisory committee to consist of "at least 
three members". 

2. The principal functions of the supervisory committee are to examine 
and audit the books and financial affairs of a credit union and generally 
to provide a degree of surveillance over its affairs and to ensure that they 
are conducted according to law. Section 32(7) of the Act sets out the 
duties of the supervisory committee as follows: 

"The supervisory committee shall from time to time examine and audit 
the books of the credit union and the deposit books of the members 
and shall check the cash, investments and securities of the credit 
union." 

Neither the Act nor the Revised Standard By-laws further defines or 
elaborates upon the scope and manner in which these duties of the super- 
visory committee should be carried out and it would appear to this Com- 
mittee that the lack of such definition constitutes a deficiency in the Act. 
After examination of other provincial legislation, which almost without 
exception defines the duties of the supervisory committee in greater detail 
than the Ontario Act, the Committee concluded that either the Act itself 
or Regulations should contain provisions to ensure that the procedures 
adopted by the supervisory committee constitute adequate surveillance 

57 



over the financial affairs of the credit union in accordance with the basic 
duties set out in section 32(7). The Committee concluded against recom- 
mending in detail the precise procedures to be adopted by all supervisory 
committees since this might be more effectively determined through con- 
sultation between the leagues and the Department. However, the Com- 
mittee does recommend that in any event the supervisory committee should, 
in addition to the present requirement to submit a report to the annual 
meeting of the credit union, be required to meet at least bi-monthly, to 
keep minutes of its meeting and, if an auditor has not been appointed by 
a credit union, to conduct an examination and audit of the credit union's 
affairs at least quarterly, reporting thereon to the board of directors. The 
Committee recognizes that certain modifications even to this brief outline 
of suggested duties of the supervisory committee might perhaps be required 
to meet the situation where an auditor has been appointed. 

3. There is some doubt as to the right of the supervisory committee to 
appoint an auditor to assist it in carrying out its duties. Section 32(13) 
gives the supervisory committee express power to appoint an auditor in 
the limited circumstances provided for in that section. 

"If a majority of the supervisory committee suspects that any of the 
funds, securities or other property of the credit union have been mis- 
appropriated or misdirected, the supervisory committee may, with the 
written approval of the supervisor, appoint an auditor or auditors to 
assist it in ascertaining whether any of the funds, securities or other 
property of the credit union have in fact been misappropriated or 
misdirected and the remuneration of any auditor or auditors so 
appointed shall be paid by the credit union." 

It might be argued that there is a general power conferred on the supervisory 
committee to engage an auditor to assist it under section 32(14) of the Act 
which reads as follows : 

'The supervisory committee may appoint such persons as it deems 
necessary to assist it in performing its duties, and the remuneration 
to be paid to such persons shall be determined by the board of directors." 

although the express power to appoint an auditor in the limited circum- 
stances set out in section 32(13) may well supersede any general power 
under section 32(14). 

4. The Committee recommends that the Act be amended to remove any 
doubt that the supervisory committee has a general power to appoint an 
auditor, as it deems fit under section 32(14), to assist it in its duties. In 
view of the fact that credit unions are financial institutions, it is always 
desirable, and perhaps necessary in some cases, that the benefit of the 
advice of an auditor be available to the supervisory committee. Accord- 

58 



ingly, the Committee recommends that section 32(14) be amended speci- 
fically to provide that the supervisory committee may appoint an auditor 
at any time to assist it and that the supervisory committee, rather than 
the board of directors, be given power to authorize the remuneration of 
such an auditor. The Committee also recommends that section 32(13) be 
amended to make it obligatory for the supervisory committee to appoint 
an auditor to assist it under the circumstances outlined in that section. 

5. A provision in the Act somewhat similar to section 31(8) concerning 
the replacement of the credit committee by a loan officer permits a credit 
union to replace the supervisory committee with an auditor if a by-law 
to that effect is enacted. Under sections 32(11) and 32(15) certain of the 
functions of the supervisory committee are vested in the auditor and the 
remaining functions not entrusted to the auditor may be vested in the 
board of directors. The relevant provisions are as follows: 

"(11) A credit union may, by by-law, provide for the appointment of 
an auditor or auditors in lieu of or in addition to the supervisory 
committee and may delegate to such auditor or auditors the whole or 
such part of the duties of the supervisory committee as the by-law 
provides. 

(15) Where a credit union pursuant to subsection 11 has passed a 
by-law appointing an auditor or auditors to perform the duties of the 
supervisory committee set forth in subsections 7 and 10, the by-law 
may delegate the remaining powers and duties of the supervisory com- 
mittee to the board of directors and provide that so long as the by-law 
remains in force it is not necessary to elect the supervisory committee 
as required by subsection 1." 

As noted in Chapter 27, the Committee favours the appointment of a 
qualified auditor by all credit unions, since the benefit of professional 
advice is an additional safeguard for the savings of the members. Although 
the Committee is advised that the by-law adopted by most credit unions 
when appointing an auditor pursuant to section 32(11) provides for the 
retention of the supervisory committee, the Committee considers that this 
should not be at the option of the particular credit union and that the 
supervisory committee should be retained in any event. There are several 
reasons why this is desirable. This Committee in its earlier Interim Report 
recommended that in certain cases and for the reasons therein given, 
business corporations be required to appoint an audit committee of the 
board of directors. 2 It seems to the Committee that the supervisory com- 
mittee can well serve as an audit committee and its continued existence 
for this purpose alone is justified. Moreover, the audit performed by a 
qualified external auditor while a valuable check on the financial affairs 
of a credit union may only be carried out on an annual basis and should 
not therefore be viewed as an adequate substitute for the continuous sur- 

59 



veillance of a supervisory committee familiar with the workings of a 
particular credit union especially if, as the Committee has earlier recom- 
mended, the supervisory committee be required to meet at least bi-monthly. 
Apart from providing a means for participation of the membership in 
credit union affairs, the continued existence of a supervisory committee 
after the appointment of an auditor serves valuable functions since, in 
addition to its prescribed duties of auditing and examining credit union 
books and financial affairs, the supervisory committee is vested with certain 
other duties and powers stemming from its central function as the guardian 
of credit union funds which would be nullified by the appointment of an 
auditor and the transfer of any remaining functions of the supervisory 
committee to the board of directors. One such additional function which, 
in the view of this Committee, itself justifies a requirement that a super- 
visory committee continue in existence after the appointment of an auditor, 
is contained in section 32(8) which provides : 

"In the event of any of the funds, securities or other property of the 
credit union being misappropriated or misdirected or in the event of 
any of the by-laws of the credit union being contravened by the board 
of directors or by the credit committee or by a member thereof or by 
an officer or employee engaged by the board of directors, the super- 
visory committee shall forthwith advise the supervisor in writing and 
shall call a general meeting of the credit union, and, pending the holding 
of the general meeting, the committee may suspend any member of 
the board of directors or credit committee or any officer or employee 
until the general meeting and may appoint a member of the credit union 
to perform the duties of the person so suspended." 

6. It appears to this Committee that the supervisory committee should 
not be required to wait until a misappropriation or misdirection of credit 
union assets has definitely been established or is actually in the course of 
taking place, as would seem to be required by the wording of section 32(8). 
They should be empowered or perhaps required to act on their reasonable 
suspicion of any misappropriation or misdirection since their early action 
might prevent losses to credit union members. With respect to the proce- 
dure for the exercise of the powers and duties of the supervisory committee 
under section 32(8), the Committee recommends that, in addition to the 
present requirement of making a report to the supervisor of credit unions 
in the event of actual or suspected misappropriation of credit union assets, 
the report should also be made to the Stabilization Board referred to in 
Chapter 25. Since the Stabilization Board might ultimately be called upon 
to make good any losses to the members resulting from a misappropria- 
tion, it should be placed as soon as possible in a position where it can 
exercise its own powers including, as we have recommended, the appoint- 
ment of an administrator to reduce or prevent further losses. Having made 

60 



a report to the supervisor and the Stabilization Board, the Committee 
does not consider that the supervisory committee should be required to 
convene a genera] meeting of the credit union except where it has exercised 
its powers of suspension or where there has been an actual misappropria- 
tion or misdirection of assets or where the supervisor or the Stabilization 
Board so direct. 

7. Section 32(8) also requires the supervisory committee to make a report 
"in the event of any of the by-laws of the credit union being contravened 
by the board of directors or by the credit committee or by a member 
thereof, or by an officer or employee engaged by the board of directors". 
It appeared to this Committee that it was somewhat inconsistent to require 
the supervisory committee to act in the event of a breach of the by-laws 
but not in the event of a breach of any provision of the Act or the Regula- 
tions. This would appear to be an unwarranted lacuna in the Act and we 
recommend that the duty of the supervisory committee to act be extended 
to breaches of the Act and of the Regulations as well as of the by-laws. 

8. A submission was made to the Committee criticizing the power of 
the supervisory committee under section 32(8) to suspend a director or 
member of the credit committee, officer or employee in the event of a 
misappropriation or misdirection of credit union assets and to appoint 
interim replacements. It was submitted that the function of the supervisory 
committee in this regard should be only to recommend suspension and 
that the power to suspend be vested in the board of directors. It appeared 
to the Committee that to vest the power to suspend a director in the board 
of directors might severely fetter if not nullify its exercise and that the 
power to suspend any director, member of the credit committee, officer 
or employee appointed by the board is one of the few remaining effective 
checks and balances between the supervisory committee, the board of 
directors and the credit committee which underlie traditional credit union 
organization of separate and autonomous committees. The Committee 
recommends that the power to suspend and to appoint interim replace- 
ments remain in the supervisory committee and be extended also to situa- 
tions where misappropriations or misdirections of credit union assets are 
reasonably suspected. 

9. There would appear at present to be little supervisory control over 
the supervisory committee imposed by the Act. Under section 32(6), pro- 
vision is made for the removal, by the members of the supervisory com- 
mittee, of a member of that committee if he fails to attend three con- 
secutive meetings without, in the opinion of the board of directors, having 
a reasonable cause therefor or fails to perform any of the duties allotted 
to him as a member of the committee. As in the case of the removal of a 

61 



member of the credit committee under similar circumstances, the Com- 
mittee recommends that the supervisory committee and not the board of 
directors should have the right to determine if the circumstances contem- 
plated by section 32(6) exist. The supervisory committee has power under 
certain circumstances to suspend the directors, but the board of directors 
has no power to suspend a member of the supervisory committee. The Com- 
mittee considered whether such a power should be vested in the board of 
directors. 3 The Committee concluded that, while there should be some 
provision in the Act to curb possible abuses and to remedy the deficiencies 
of inactive or inept members of the supervisory committee, particularly 
if the supervisory committee fails to act under section 32(6), such controls 
as might be recommended should not be vested in the board of directors. 
One of the most effective checks upon the board of directors is the 
power of the supervisory committee to suspend any director and this 
might be weakened if the board of directors were to have the power to 
suspend a member of the supervisory committee. The Committee recom- 
mends that, as in the case of directors and members of the credit com- 
mittee, the Act provide that the members have the right to remove a 
member of the supervisory committee by ordinary resolution passed at a 
general meeting, subject to the same procedural requirements. 



10. The Committee recommends that: 

(a) the Act be amended to provide for a supervisory committee of 
at least three members ; 

(b) the duties of the supervisory committee be expanded in the Act 
to include requirements to submit a report to the annual meeting, 
to meet at least bi-monthly, to keep minutes of its meetings and, 
if an auditor has not been appointed by a credit union, to examine 
and audit the affairs of the credit union at least quarterly, reporting 
thereon to the board of directors ; 

(c) the supervisory committee be given a clear independent power to 
appoint an auditor to assist it and to authorize the remuneration 
of the auditor so appointed ; 

(d) that section 32(13) be amended to require the supervisory com- 
mittee to appoint an auditor in the circumstances set out in that 
section ; 

(e) section 32(11) be amended to require the retention of the super- 
visory committee after the appointment of an auditor and that 
section 32(15) therefore be repealed; 

62 



(f) section 32(8) be amended to require the supervisory committee to 
act upon a reasonable suspicion of a misappropriation or mis- 
direction of assets; 

(g) section 32(8) be further amended to provide that in the circum- 
stances outlined in that section the supervisory committee be 
required to advise both the supervisor and the Stabilization Board; 

(h) section 32(8) be further amended to provide that the supervisory 
committee shall also advise both the supervisor and the Stabiliza- 
tion Board of breaches of the Act and of the Regulations; 

(i) section 32(8) be further amended to provide that the supervisory 
committee shall not be required to convene a meeting of members 
unless it has exercised its power of suspension thereunder or 
there has been an actual misappropriation or misdirection of 
assets or the supervisor or the Stabilization Board direct that a 
meeting be convened; 

(j) the present power of suspension conferred on the supervisory 
committee by section 32(8) be retained and extended to include a 
power to suspend for any misappropriation or misdirection of 
assets reasonably suspected ; 

(k) the supervisory committee and not the board of directors should 
have the right to determine if the circumstances exist which give 
rise to the right to declare a vacancy on the supervisory committee 
under section 32 (6); and 

(1) the members of the supervisory committee be subject to removal 
by resolution of the members in general meeting subject to the 
same procedural requirements recommended for the removal of 
directors of a credit union in Chapter 14. 



1. Section 32(1). 

2. First Interim Report, Chapter X, Section 2. 

3. As in the Prince Edward Island Act, section 19(3). 



63 



CHAPTER 17 

Internal Administration 

Standard of Care of Directors and Members of the Credit 
and Supervisory Committees 

1 . The Act contains no provision setting out the standard of care which 
a director or a member of the credit committee or supervisory committee 
is expected to exercise in the conduct of the affairs of the credit union. 
There would appear to be no reported cases in Canada in which the 
standard of care demanded of those involved in the administration of 
credit union affairs has been considered and the relevant legislation of 
other provinces is also silent in this regard. The directors and perhaps 
the members of the two committees of a credit union stand in a fiduciary 
relationship toward the credit union and therefore owe a duty to act 
honestly and in good faith. Since such persons as elected representatives 
of the membership are invested by statute with certain powers and duties 
and have certain responsibilities for the savings of other members placed 
with the credit union, it seems evident that they must also perform their 
duties with a degree of care, skill and diligence. The Committee therefore 
concluded that the directors and members of the credit and supervisory 
committees should be required to exercise a degree of care, skill and 
diligence measured by an objective standard in the conduct of their duties. 

2. In the absence of any legislative or judicial guidelines, it is difficult 
to formulate with any degree of precision the standard of care, skill and 
diligence which, in the view of this Committee, should be required of 
members involved in the administration of the affairs of credit unions. 
The Committee concluded after deliberation of this problem that a standard 
of care, skill and diligence should be included in the Act and recommends 
that, so far as directors are concerned, the standard recommended by 
this Committee for the director of a business corporation in the first 
Interim Report in Chapter VII be made applicable to directors of credit 
unions. With respect to the standard of care, skill and diligence to be 
required of members of the credit committee and the supervisory com- 
mittee, we recommend that the same basic standard applicable to credit 
union directors also apply to members of the credit committee and super- 
visory committee. 

3. The Committee recognizes that the value of having a standard of care 
set out in the Act in the terms recommended above depends upon the 
means available to the membership for enforcing it. The present position 
of an action by a member on behalf of the credit union to enforce whatever 
duties might be owed under the common law would seem to be obscure, 

64 



and as far as can be established has hitherto remained academic. It appears 
possible that a minority shareholder's action might lie if illegal or ultra 
vires actions or a fraud on the minority can be alleged despite the special 
nature of credit union shares with the limit of one vote per member 
regardless of the number of shares held. The Committee recommends that 
a derivative right of action similar to that recommended for shareholders 
of a business corporation in the first Interim Report of this Committee in 
Chapter VII also be made available to credit union members who would 
thereby be enabled to enforce the standard of care recommended for 
directors and members of the credit committee and supervisory committee. 

4. The Committee recommends that: 

(a) the standard of care, skill and diligence to be exercised by the 
director of a business corporation as recommended by the Com- 
mittee in Section 2 of Chapter VII of its first Interim Report be 
made applicable to directors and members of the credit committee 
and supervisory committee of a credit union ; and 

(b) a derivative right of action similar to that recommended for share- 
holders of a business corporation in Section 4 of Chapter VII of its 
first Interim Report be made available to members of a credit union. 



65 



CHAPTER 18 

Internal Administration 

Voting Rights 

1 . In keeping with the co-operative nature of a credit union, each member 
has only one vote regardless of the number of shares held and the use of 
proxies is generally prohibited. Section 24 of the Act provides as follows: 

"No member shall have more than one vote, and voting by proxy shall 
be allowed only when shares are held by an agricultural association, a 
municipal body, a school board, or other corporation." 

2. The limitation of one vote per member ensures that, unlike an ordinary 
business corporation, a credit union cannot be controlled by members 
with large investments and the democratic value of this co-operative 
principle persists regardless of the size of the credit union. However, unlike 
the one vote per member principle, the value of a general prohibition on 
the use of proxies by individual members diminishes with the size of a 
credit union. In a small credit union operating in a restricted local area, 
the interdiction on the use of proxies might well encourage membership 
participation at meetings although even in smaller credit unions there must 
be a certain amount of member apathy. The larger the credit union, either 
terms of membership or in area served, the more difficult it becomes to 
engender member participation at meetings and there are undoubtedly 
many members of larger credit unions who do not attend meetings. In the 
case of a few credit unions which are organized with a province wide 
occupational bond many members cannot attend meetings either because 
of the distance or expense involved. Under these circumstances, to deny 
a member the power to vote by proxy may effectively deprive him of his 
vote and thereby from participating altogether in the affairs of a credit 
union. The non-attendance of members at meetings may become more 
pronounced if, as a result of the broadening of the membership bond, as 
the Committee has recommended, the trend is towards fewer but larger 
credit unions. It may be necessary at some time in the future to consider 
empowering credit unions to permit their members to vote by proxy or 
perhaps to establish some form of delegate voting as is presently permitted 
in the case of co-operative corporations under The Corporations Act. 

3. In the view of this Committee, it would be premature to make specific 
recommendations at this time since the extent to which changes may be 
necessary and the means by which they can most effectively be accom- 
plished might best be considered in the light of the experience of the credit 
union movement during the period of transition and growth of credit 
unions which may follow if the recommendations of this Committee are 
implemented. 

66 



CHAPTER 19 

Loans 

1. Section 4(1) of the Act sets out the objects and purposes of a credit 
union as: 

"(a) the receiving of moneys on deposit from members and as payment 
for shares ; 

(b) the making of loans to members with or without security for 
provident and productive purposes." 

In Ontario, most credit union loans are personal consumer loans although 
some credit unions, particularly those organized with an ethnic bond, have 
traditionally emphasized mortgage lending. The concentration on consumer 
loans provides another point of contrast with the caisses populaires which 
have traditionally favoured mortgage loans and which can probably be 
attributed to their separate historical development. However, the differ- 
ences in the lending policy of a typical caisse populaire and a typical credit 
union are narrowing since caisses populaires are steadily increasing the 
proportion of loans made for personal consumption while many credit 
unions, particularly those in urban areas, are expanding their activities 
in mortgage loans. 

2. There is no statutory limit on the proportion of credit union assets 
which may be invested in loans to members and the practical lending limits 
of a credit union in Ontario are usually determined firstly by the success 
of its educational program, promoted and arranged through the leagues, 
in persuading members to invest their savings in the credit union thereby 
providing funds available for lending to its members and, secondly, by 
the ability of a credit union to borrow, usually but not exclusively from a 
league central or OCCS. As noted in connection with our consideration 
of the borrowing powers of credit unions, the Act limits such outside 
borrowings to a maximum of 50% of the total of the capital, deposits and 
surplus of the credit union. 

3. The Revised Standard By-laws, in a somewhat tortuous provision, 
regulate the amounts which may be available to individual members at 
any time by way of secured or unsecured loans, and provide as follows: 

"(a) The total amount on loan to any member at any time shall not 
exceed five hundred dollars ($500.00) unless security therefor has 
been given. 

(b) The total amount on loan to any member at any time shall not 
exceed SI, 000.00 in excess of the member's savings, or 5% of the 
credit union's capital and deposits in excess of the member's 
savings, whichever is the greater. 

67 



(c) Unless secured by a first mortgage of real estate no loan shall be 
made in an amount which exceeds the member's saving by 

(i) three thousand dollars ($3,000.00) 
or 

(ii) an amount equal to 2% of the total of the capital and deposits 
of the credit union, whichever is the greater, provided in any 
event that no loan shall be made in an amount which exceeds 
the member's savings by more than five thousand dollars 
($5,000,00) unless so secured by a first mortgage of real 
estate; and 

in no case shall the total amount on loan to any member at 
any time, exceed the member's savings by more than fifteen 
thousand dollars ($15,000.00)." 

Since not all credit unions have enacted the Revised Standard By-laws, 
particularly those incorporated some time ago, there is some degree of 
variation between credit unions on the maximum amount of any loan. 
This may also occur where the supervisor approves a by-law providing 
for different limits. 

4. Interest on loans is responsible for most of the profits of a credit 
union. The maximum rate of interest a credit union may charge is limited 
by statute to 1% per month 1 and, although the maximum rate appears to 
have become the normal rate for personal consumer loans at least, some 
credit unions give rebates of loan interest and almost all credit unions 
arrange life insurance for members on outstanding loan balances. 

5. Although most loans by credit unions are consumer loans, there has 
been a growing tendency on the part of some credit unions towards 
increasing the number of mortgage loans which they make. Mortgage 
lending is undoubtedly a legitimate and valuable function of a credit union 
and one which is likely to increase in importance in the future. There are 
nevertheless certain risks associated with mortgage lending if too much is 
loaned on a particular piece of property for too long a period. The Depart- 
ment has also indicated its concern over possible adverse effects upon the 
general level of liquidity maintained by mortgage lending credit unions 
resulting from a reduction in the flow of repayments as assets are diverted 
from short term consumer loans to longer term mortgage loans. 

6. The Department has unofficially limited the maximum but renewable 
term of a mortgage loan to five years and the maximum amount which 
may be loaned upon security of any property to 66%% of its appraised 
value. The Department has also recommended that a credit union limit 
its total investment in mortgage loans to 25% of its combined shares and 
deposits and has indicated that a higher level of liquidity is expected of 
credit unions which invest a substantial porportion of their funds in mort- 

68 



gage loans. The following scale relating the percentage of liquidity to the 
proportion of its assets invested in mortgage loans has been recommended 
by the Department as a guide to credit unions: 

Mortgage Loans in aggregate Corresponding liquidity required 

expressed as a percentage expressed as a percentage of 

of total assets members' shares and deposits 



20% 


20% 


30% 


25% 


40% 


30% 


50% 


35% 



The Committee was advised that the Departmental recommendations 
respecting the maximum term for mortgage loans and the maximum 
amount to be advanced upon any property are widely accepted, but that 
a number of credit unions have not adopted the limits upon the proportion 
of their assets which may be invested in mortgage loans and the suggested 
adjustments in their liquidity in accordance with the scale referred to 
above. 

7. We consider that the present Departmental limit of five years as an 
initial maximum term to be satisfactory but the limitation of an individual 
mortgage to 66%% of appraised value is too low and should be raised to 
75%. However, if a credit union were to become an approved lender for 
the purpose of making loans under the National Housing Act, these 
limitations should not apply and such a credit union should be permitted 
to make mortgage loans under that Act within the limits provided therein. 
We recommend against the enactment of any limitation on the proportion 
of credit union assets which may be invested in mortgage loans or of a 
scale which would relate the general liquidity base to the proportion of 
credit union assets invested in mortgage loans since in our view these are 
makeshift measures designed to offset the shortcomings of the Act which 
does not contain any general minimum liquidity requirement for all credit 
unions. If, as is recommended by this Committee in Chapter 24, all credit 
unions should be required to maintain in liquid assets 10% of the total of 
shares, deposits and borrowings, there is in our view no basis for further 
limiting the proportion of shares and deposits a credit union may invest 
in mortgage loans or to require a corresponding increase in the minimum 
general level of liquidity. 

8. Credit unions are limited by section 4 (1) (b) of the Act to making loans 
to members "for provident and productive purposes". There are no further 
qualifications to this phrase which is as old as the credit union movement 
and which for all practical purposes has for some time been interpreted to 

69 



include loans for such purposes as the board of directors, who are re- 
sponsible for the lending policy of the credit union, may determine. In its 
original context, loans for provident and productive purposes would have 
excluded many personal consumer loans although such loans currently 
form a large proportion of the loans made by credit unions in Ontario 
today. The Committee considered whether it was desirable to retain in the 
Act a phrase limiting the approved purposes of credit union loans which 
has outworn its original meaning. It appears that every provincial Act 
except two contains a clause similar to section 4 (1) (b) although there is 
some variation as to whether loans must be for "provident and productive 
purposes" as in Ontario, or "for provident or productive purposes", or 
"for provident, productive and merchandizing purposes". The Acts of 
Quebec and British Columbia contain no reference to the purposes for 
which loans may be made. The limitation of loans to "provident or pro- 
ductive purposes" seems never to have been included in the Quebec 
legislation and this requirement was deleted from the British Columbia 
Act in 1961. The Committee has been advised that the applicant for a loan 
from a credit union is usually required to state in the loan application the 
purpose for which the loan is desired but it is doubtful if either the credit 
committee or the loan officer can effectively police the requirement. While 
the Committee does not wish to interfere with the policy of any credit 
union for the processing of loans, it does appear that the requirement that 
loans be made for "provident and productive purposes" may impose a 
condition that is impossible in some cases for credit unions to meet and the 
Committee therefore recommends the deletion of these words. If any credit 
union, as a matter of loan policy, wishes to maintain such a limitation, it 
would of course be free to do so. 

9. The rate of interest a credit union may charge on loans to members is 
limited by statute in Ontario to 1% per month. A similar restriction exists 
in the Act or standard by-laws of each province except Quebec, where there 
is no restriction. The draft new Manitoba Act would limit the maximum 
rate of interest on loans to that prescribed by the Lieutenant-Governor in 
the standard by-laws. As previously noted, the maximum rate appears to 
have become the normal rate of interest, at least for personal consumer 
loans, but a large number of credit unions give rebates of interest and 
nearly all credit unions arrange life insurance for borrowers on the out- 
standing balance. With the high prevailing interest rates, credit unions are 
finding it more difficult to maintain a sufficient spread between the cost of 
borrowing money from members, or from outside sources, and the interest 
ceiling and the Committee received submissions urging that the interest 
ceiling be either raised or removed altogether from the Act. 

10. Credit unions are, in our opinion, non-profit institutions one of 
whose principal aims is to provide credit services for members at the 

70 



lowest possible cost and we are, therefore, reluctant to recommend any 
change in the maximum interest rates which might encourage credit unions 
to charge more than is absolutely necessary to function in an effective 
manner. Although it might be argued, and in many cases it would be true, 
that an increase in interest rates would be offset where possible by increased 
rebates of loan interest, there is no requirement that interest rebates be 
made. To remove a limit on the permitted lending rate of credit unions 
might, in our view, favour poorly managed credit unions by enabling them 
to cover managerial inefficiencies by increasing their lending rates. On the 
other hand, we recognize that credit unions may suffer from a competitive 
disadvantage particularly under present economic conditions by not being 
able to offer members a return on their investment comparable with that 
offered by chartered banks and trust companies which are now permitted 
to adjust at will both their borrowing and lending rates. The Committee 
therefore recommends that the Act be amended to provide for an interest 
ceiling of 1% per month subject to such increase as may be prescribed by 
Regulation which will enable adjustments to be made as necessary to meet 
market conditions. A similar provision exists in British Columbia and in 
that province a Regulation, approved October 17, 1969, has provided for an 
increase in interest rates. 2 

1 1 . Section 29(3) of the Act provides that a director, officer or member of 
either the credit committee or the supervisory committee may not borrow 
more than the amount of his paid up shares and deposits in the credit union 
unless the loan is approved not only by the credit committee but also by the 
supervisory committee and the board of directors. It was submitted to this 
Committee that this exceptional procedure be deleted since it was no longer 
necessary as a safeguard to prevent those responsible for the administration 
of the affairs of the credit union from making loans to themselves on a 
preferential basis and imposed an unnecessary indignity upon those 
persons subject to the provision. The Committee examined the equivalent 
provisions in other provincial legislation which in most cases require a 
special procedure for the authorization of loans in these circumstances 
substantially similar to that presently required under the Ontario Act. In 
Quebec, members of the credit committee and supervisory committee are 
not permitted to borrow from the credit union at all. 3 The Committee 
concluded that it would be undesirable to amend section 29(3) in accor- 
dance with the submission. As a general principle, dealings between those 
involved in the administration of a corporation's affairs and the corporation 
should be subject to close scrutiny and the procedure and conditions should 
be such as not only avoid any actual or potential conflict of interest but 
also the suspicion of any conflict or preferential treatment at the expense 
of the members. In this regard we would refer to our recommendations in 
Chapter VII of the first Interim Report concerning conditions under which 
contracts could be entered into between a director and a company. In a 

71 



credit union where the management is divided between the board and the 
credit and supervisory committees, the equivalent of approval by a dis- 
interested board of directors of a business corporation would seem to this 
Committee to involve the approval of the three bodies responsible for 
administering the affairs of the credit union. Furthermore, it seems possible 
that, were the submission to be adopted, a conflict of interest might arise in 
those credit unions where a loan officer has been appointed since he is 
presently appointed by and responsible to the board of directors who might 
thus be placed in the extraordinary position of making loan applications 
qua members to a person who is appointed by and responsible to those 
members qua directors. We consider that such a result would be embar- 
rassing to both the members of the board of directors and the loan officer 
and could result in a genuine conflict of interest. 

12. The Committee recommends that : 

(a) the present practice of limiting the maximum amount of any loan 
by by-law rather than by a provision in the Act should be con- 
tinued since this permits a maximum of flexibility throughout the 
entire movement; 

(b) the Act provide that the maximum term of any mortgage be five 
years, subject to renewal, and that the maximum amount which 
may be loaned by way of mortgage, in addition to any limitation 
in the by-laws of a credit union on the maximum amount of any 
loan, not exceed 75% of the appraised value of the property 
mortgaged ; 

(c) if a credit union becomes an approved lender for the purpose of 
making loans under the National Housing Act, it should be 
permitted to make loans under that Act within the limits pro- 
vided therein; 

(d) no additional liquidity requirement, other than that recommended 
in Chapter 24, be imposed in respect of mortgage loans ; 

(e) the Act not restrict the aggregate amount of mortgage loans of a 
credit union to a certain percentage of its assets ; 

(f) section 4(1 )(b) be amended by deleting the phrase "for provident 
and productive purposes" ; 

(g) the present limitation on the rate of interest which may be charged 
be retained subject to increase by Regulation ; and 

(g) there be no change in the provisions of section 29(3) of the Act. 



1. Section 29(2). 

2. B.C. Reg. 265/69, approved October 17, 1969. 

3. Quebec Act, sections 57 and 64. 



72 



CHAPTER 20 
Borrowing Powers 

1. Section 36 of the Act provides: 

"The board of directors of a credit union may pass resolutions for 
borrowing money, but at no time shall the total amount borrowed 
exceed 50 per cent of its capital, deposits and surplus." 

Under section 38, any borrowing up to 25% of the total of capital, deposits 
and surplus is within the discretion of the board of directors, but borrowing 
in excess of this amount requires the confirmation of two-thirds of the 
members present at a special general meeting, the notice of which must 
include the terms of the proposed resolution, or their unanimous approval 
if no meeting is convened. A confirmation by the members of such a 
resolution may not be given for a term exceeding one year. No submissions 
have been made to the Committee which indicate that the borrowing base 
is either inadequate or too large and the Committee does not recommend 
that any change be made in the borrowing base. 

2. The limitations in section 36 of the Act on the right of a credit union 
to borrow apply to outside borrowings since, by reason of section 37, 
moneys received on deposit from members are not considered as borrow- 
ings. The Act does not contain a definition of the term "deposits" and it 
may not be entirely clear if "term deposits" would be considered as de- 
posits within the meaning of section 37 or as borrowings by the credit 
union subject to the overall limitation. 

3. The limitation on borrowing contained in section 36 was undoubtedly 
designed to prevent credit unions from over extending by disproportionate 
borrowing. If term deposits are deposits for the purposes of section 36, a 
credit union will be able to borrow more since such term deposits will 
swell the total of shares, deposits and surplus which form the yardstick of 
the borrowing power. If they are not classed as deposits, the borrowing 
base of a credit union is proportionately reduced. The Committee was 
advised that the Department classifies term deposits as deposits for the 
purpose of section 36 on the basis that term deposits may be accepted only 
from members and to that extent they constitute members' savings. In 
addition, all interest payable on term deposits is distributed within the 
membership group, whereas borrowings are from persons or institutions 
outside the membership. A different view has been taken in Manitoba 
where term deposits are excluded from the borrowing base. 

4. The Committee agrees with the reasoning adopted by the Department 
and recommends that the Act be clarified by including in the definition 

73 



section a definition of deposits which would specifically include term 
deposits. The Committee is also of the view that, once the members have 
confirmed a resolution to authorize borrowings in excess of 25% of capital, 
deposits and surplus, no yearly confirmation should be necessary, but the 
members should have the right at an annual or special general meeting to 
revoke any resolution previously confirmed. 



74 



CHAPTER 21 
Term Deposits 

1. There has been an increasing tendency on the part of some credit 
unions to accept term deposits at fixed rates of interest from members. This 
may be in some part a response to increased competition which credit 
unions are probably experiencing from chartered banks, loan and trust 
corporations and other financial institutions for the savings of members. 
Although only a relatively small number of credit unions in Ontario 
presently offer their members this particular service, there is a likely trend 
towards increased acceptance of term deposits as a standard service and 
this has caused some concern among various provincial authorities. 

2. To some degree, the acceptance of a deposit for a fixed term at a guaran- 
teed rate of interest by any financial institution involves a risk that the pre- 
vailing interest rate at the date of acceptance of the deposit may decrease 
during the term of the deposit making it an expensive means of borrowing 
money. In the case of credit unions, however, term deposits may pose 
special problems not experienced by other financial institutions. 

3. The maximum rate of interest a credit union may charge its borrowers 
is presently limited by statute to 1% per month. Chartered banks and loan 
and trust companies are not subject to any interest ceiling on their lending 
rate and may ensure that a sufficient interest spread is maintained between 
the cost of borrowing money by means of term deposits and the rate at 
which they lend money to operate at a profit. In order to compete, credit 
unions are in the position of having to offer their members interest rates 
on term deposits equivalent to those offered by chartered banks and loan 
and trust companies but are limited in the rate they may charge on loans 
made with money borrowed by means of term deposits. In times of high 
interest rates, a lending rate of 1% per month may be too low to enable a 
credit union to convert term deposits to profitable use. Yet, if a credit 
union is not permitted to match interest rates offered by other institutions 
it may encounter difficulty in attracting funds. 

4 Term deposits require a high degree of managerial skill in order that 
the funds received may be profitably invested during the currency of the 
term and that the principal and interest will be available for repayment, 
particularly if the principal may be withdrawn before maturity subject to 
an interest penalty. Credit unions for the most part, as local co-operative 
institutions intended to be managed by the members, may lack both the 
experience and competence of other financial institutions in accepting term 
deposits and yet because of the interest ceiling on the lending rate may have 
to work with a lower spread. 

75 



5. In addition to problems in attracting funds in competition with banks 
and loan and trust companies and managing term deposits so as to produce 
a profit with what might well be a smaller spread and ensuring the avail- 
ability of principal and interest upon maturity, acceptance on a large scale 
of term deposits at high rates of interests may seriously affect the financial 
stability of a credit union by reducing the net profits of the credit union 
from which the annual appropriation to the guarantee fund is made, since 
in computing such profits a deduction is first made for interest paid on 
deposits. From a financial viewpoint, it is undesirable that the adequacy of 
credit union reserves be unduly lowered by the expense of interest in attract- 
ing term deposits. From a philosophical viewpoint, it may also appear 
questionable in principle whether members should receive a reduced divi- 
dend in order to pay higher rates of interests on term deposits. 

6. The concern of the Department over the possible effects of term deposits 
on the financial stability of a credit union resulted in an amendment to the 
Act by the enactment of section 28a which came into force on July 1, 1967. 
This section provides : 

"28a. A credit union may by by-law provide for accepting moneys for 
deposit in respect of which a specified rate of interest is payable only if 
the deposit is not withdrawn for a fixed term, and the credit union shall 
set aside a reserve fund, adjusted annually, in the amount of the 
interest accruing on such deposits." 

By permitting credit unions to accept term deposits only if authorized by 
by-law, the Department can ensure through the discretionary approval of 
the supervisor needed as a prerequisite to the validity of the by-law that 
only those credit unions which in the opinion of the Department are 
competent to manage term deposits would be permitted to offer this service 
to their members. Moreover, the term of the deposit is also regulated since 
the by-law which the supervisor will approve must limit the maximum 
term to five years, which the Committee understands is not renewable. 

7. The Committee was advised that the intended effect of the amendment 
was also to require credit unions to create and maintain a sinking fund for 
the principal and accrued interest on outstanding term deposits so as to 
ensure the existence of an adequate readily realizable fund for repayment 
of the term deposit upon maturity. In the view of this Committee, section 
28a does not implement that intention. In fact, it is difficult to ascertain 
precisely what this section accomplishes. 

8. Although the matter is not entirely free from doubt, it would appear 
that section 28a authorizes both term deposits which are withdrawable 
before maturity subject to an interest penalty and non-withdrawable term 
deposits but that only the latter are made subject to the reserve require- 
ments contained in the section. The Committee is advised that this is the 
interpretation adopted by the Department. However, since nearly all term 

76 



deposits accepted by credit unions are of the kind withdrawable before 
maturity subject to an interest penalty, the provision for a reserve require- 
ment in section 28a is of very limited application. 

9. For the small number of non-withdrawable term deposits it does 
regulate, section 28a requires that a "reserve fund adjusted annually, in 
the amount of interest accruing on such deposits" shall be maintained. 
There is no requirement to place into a reserve each year a proportion of 
the principal or that the reserve be maintained as a separate fund. It is 
therefore conceivable that a credit union could invest the whole of its 
accumulated reserve for term deposits in further loans to its members. 

1 0. The Department is concerned over the lack of an effective requirement 
for a reserve of principal and interest maintained in liquid investments as 
was intended when the amendment to the Act to regulate term deposits 
was proposed. As a matter of practice, therefore, the Department requires 
as a condition to granting the discretionary approval of the by-law required 
under section 28a, a written undertaking from the credit union to maintain 
a reserve of principal and interest in liquid investments which as defined 
by the Department include deposits in OCUL. This Departmental require- 
ment, which is of questionable legal validity, is imposed only for non- 
withdrawable term deposits since it is not possible to set up a reserve of 
principal and interest for term deposits which may be withdrawable before 
maturity. It would appear then that the present position in Ontario is that 
withdrawable term deposits are not subject to any controls except the 
limit of the term of five years, while the isolated instances of non-with- 
drawable term deposits are subject to a limited and perhaps unworkable 
reserve requirement under section 28a implemented by an extra-legal 
Departmental requirement to correct the deficiencies of the section by 
means of an undertaking. 

1 1 . There is no uniformity among other provincial legislation regulating 
term deposits. In Saskatchewan, which on November 15, 1969 repealed 
certain restrictions relating to term deposits, the amount a credit union 
may accept in term deposits is limited to the total of its shares and deposits 
and the term is limited to a maximum of five years, non-renewable. 1 In 
British Columbia, there is a limit of six percent on the maximum rate 
payable on term deposits unless the Inspector permits a higher rate. 2 In 
Manitoba, term deposits have been excluded as deposits from the borrow- 
ing base. 3 In Manitoba, Saskatchewan and British Columbia, term 
deposits are subject to the statutory liquidity requirement imposed upon 
credit unions in those provinces. 4 

12. If the credit union movement is not to decline in Ontario, it must be 
enabled to complete effectively with other financial institutions. As already 

77 



noted, prompted perhaps by the effects of increased competition, credit 
union members today demand an increasing variety of services, and the 
future development of the credit union depends upon its ability to offer 
the members the services available in competing financial institutions. On 
the other hand, it is of overriding importance that the expansion of 
services should not jeopardize the investments of members and it is impor- 
tant that the stability of a credit union is not endangered by the added 
risks which unregulated acceptance of term deposits might well involve. 

13. It appears to the Committee that an important area of control is 
to ensure that only those credit unions with proven competent management 
should be permitted to accept term deposits. Since this is not necessarily 
related to the size of a credit union, we consider the present requirement 
of an enabling by-law for this purpose, which requires the approval of 
the supervisor before it is effective, to provide a suitable means of limiting 
the power to accept term deposits to those credit unions regarded as 
competent to do so. No submissions have been made to the Committee 
to the effect that this present requirement of the Act be changed. The 
Committee is also of the view that no maximum interest rate in respect of 
term deposits be provided in the Act. In the view of the Committee, a 
credit union must be in a position to compete for the savings of its members 
and it is possible that a maximum interest rate fixed by statute or regulation 
would be too inflexible to respond to market conditions. We realize, how- 
ever, that in permitting credit unions to determine the maximum rate of 
interest they can offer without affecting either the profitability of the 
particular service, or the dividends payable to members, places a con- 
siderable responsibility upon the management of a credit union. There 
should be a limit on the maximum term of a term deposit and the present 
administrative limit of a five year non-renewable term appears to be 
suitable. 

14. We have recommended in Chapter 24 that a general liquidity factor 
of 10% of shares, deposits and borrowings be imposed on all credit unions 
and, since the Department, rightly in our view, classifies term deposits as 
deposits, term deposits should be included in the general liquidity require- 
ment. The Committee considered whether a distinction should be made for 
liquidity purposes between term deposits which are withdrawable before 
maturity subject to an interest penalty and the so-called non-withdrawable 
term deposits. It seems likely, however, that even in the latter case a credit 
union in the interests of good relations among its members might very well 
permit the withdrawal of the so-called non-withdrawable term deposit 
before maturity. No other province which includes term deposits in 
liquidity requirements draws such a distinction and in the opinion of the 
Committee it is inadvisable to do so in Ontario. 

78 



15. The Committee recommends that: 

(a) credit unions, if authorized by by-law, be permitted to accept term 
deposits from members; 

(b) the Act specify no maximum interest rate payable in respect of 
term deposits; 

(c) the Act provide that the maximum term of a term deposit be five 
years, non-renewable; 

(d) term deposits be included as deposits for the purposes of the 
liquidity requirements recommended by the Committee in Chap- 
ter 24; and 

(e) the portion of section 28a relating to a reserve in respect of 
interest on term deposits be repealed as serving, in practice, no 
useful purpose. 



1. Saskatchewan Standard By-Laws, articles 76(a) to 76 (m), as amended by O.C. 
1417/68 and O.C. 1706/69. 

2. B.C. Reg. 2/69, Rule 5.01. 

3. Manitoba Act, section 41. 

4. Ibid., section 57A. 
Saskatchewan Act, section 85(1). 
British Columbia Act, section 34(1). 

79 



CHAPTER 22 
Financial Stability 

General 

1. The financial stability of credit unions is a matter of importance not 
only to the members but in the public interest. The acceptance by a credit 
union of moneys from its members, either by way of deposits or as payment 
for shares, imposes a responsibility on the credit union to protect such 
funds against losses and to meet the demands of members, when made, for 
the withdrawal of funds. The financial soundness of credit unions depends 
upon a number of factors such as adequate reserves, liquidity, external 
audit, supervision and a stabilization or mutual aid fund. 

2. All provincial legislation contains, to a greater or lesser degree, pro- 
visions which are designed to promote or ensure the financial soundness 
of credit unions. All legislation provides that a credit union must, before 
any division of profit among members by way of dividend or rebate of 
interest, set aside a reserve against uncollectible loans. Some legislation 
requires that credit unions maintain a certain percentage of assets in liquid 
form. In all provinces, either by legislation or as a result of practice, credit 
union affairs are subject to external examination. A number of provinces 
have required credit unions of a certain size to appoint auditors. Some 
provinces require credit unions to contribute to a mandatory stabilization 
or mutual aid fund which is in effect a form of insurance designed to protect 
members of credit unions against loss. 

3. The various matters relating to the financial stability of credit unions 
are examined in greater detail in the following Chapters 23 to 27. 



80 



CHAPTER 23 

Financial Stability 
The Guarantee or Reserve Fund 

1 . Section 28 of the Act requires every credit union to set aside at least 
20% of its yearly net profits as a guarantee fund to meet losses and the fund 
is to be held as a reserve against uncollectible loans and losses. The section 
also provides that, where at the close of any fiscal year the amount set 
aside for the guarantee fund equals at least 10% of the total amount re- 
ceived from members on deposit and as payment for shares, the directors 
may, subject to the approval of two-thirds of the members present at the 
annual meeting, direct that no moneys be set aside for the guarantee fund 
for the then current year. In the case of a credit union whose combined 
share capital and deposits exceed $500,000 and whose guarantee fund 
equals at least 5% of the total amount received from members on deposit 
and as payment for shares, the directors may, with the approval in writing 
of the Director and with the approval of two-thirds of the members present 
at an annual or special meeting, direct that no moneys or that a sum less 
than 20% of yearly net profits be set aside for the guarantee fund. Any 
approval so given by the Director may be revoked at any time. 

2. While the stated purpose of the guarantee fund is to act as a reserve 
against uncollectible loans and losses, the Departmental practice is to 
permit the guarantee fund to be used solely as a reserve against bad and 
doubtful debts. Any other loss experienced by a credit union, for instance 
on the sale of investments, would under this practice have to be met from 
operating revenues for the year rather than charged to the reserve. 

3. A credit union, being a co-operative, distributes its yearly net profit to 
its members either in the form of dividends on shares or by way of rebate of 
interest paid by members on loans. If all of the yearly net profit was so 
distributed, without an adequate provision for uncollectible loans and 
losses, it is apparent that members' shares and deposits would be impaired 
in the event of uncollectible loans or other losses. A proper allowance for 
bad and doubtful debts is essential. 

4. The Committee is concerned that an allowance for uncollectible loans 
measured by a percentage of either net or gross profit is not an appropriate 
yardstick to produce a proper allowance. An allowance founded on this 
basis could be too high in some cases and too low in others dependent upon 
the collectibility of the loans made by the credit union. Generally accepted 
accounting practice requires, in determining the financial position of any 
organization at a given date, that judgment be exercised which will give 
due recognition to bad and doubtful debts and that those debts which have 
become bad or doubtful should either be written off or provided for. The 
charge in respect of such bad and doubtful debts is generally regarded as a 

81 



cost of earning income. Accordingly, the net profit of the organization is 
arrived at after making due provision for bad and doubtful debts. 

5. The Committee has concluded that the present basis of providing for 
the guarantee or reserve fund in section 28 should be changed from a fixed 
percentage of yearly net profit to one which will reflect a proper allowance 
for bad and doubtful loans. Normally, the determination of the amount to 
be written off for bad debts and the allowance for doubtful debts is a 
function of management with the assistance or approval of the auditors. 
While management of a credit union should not be relieved of this obliga- 
tion it is recognized that, in the case of a great many credit unions, manage- 
ment may not be sophisticated in this area and auditors may not have been 
appointed. It therefore seemed desirable that the Act include minimum 
provisions with respect to the valuation of loans. Such provisions, of 
necessity, must be arbitrary and, after careful consideration, the Committee 
is of the opinion that the provisions of the Co-operative Credit Associations 
Act 1 in this respect offer a fair guideline to the method by which loans 
should be valued and the reserve or guarantee fund established. 

6. The Committee accordingly recommends that in determining the 
financial position of a credit union management shall make proper pro- 
vision for bad and doubtful accounts and that, in any event, in respect of 
any loan made by a credit union that is in default as to principal or interest 
there should be an allowance based on the following formula : 

(a) where the loan is in default as to principal or interest for a period 
of three months but less than six months, ten per cent of principal, 
interest due and recorded accrued interest; 

(b) where the loan is in default as to principal or interest for a period 
of six months but less than twelve months, twenty-five per cent 
of principal, interest due and recorded accrued interest; 

(c) where the loan is in default as to principal or interest for a period 
of twelve months but less than eighteen months, fifty per cent of 
principal, interest due and recorded accrued interest; 

(d) where the loan is in default as to principal or interest for a period 
of eighteen months but less than twenty-four months, seventy-five 
per cent of principal, interest due and recorded accrued interest; 
and 

(e) where the loan is in default as to principal or interest for a period 
of twenty-four months or more, one hundred per cent of principal, 
interest due and recorded accrued interest. 

The Credit Unions Act of British Columbia 2 requires a reduction in the 
value of loans computed on the same basis. The standard by-laws under 
the Alberta Act also base the reserve fund on an aging of loans. The 
latest draft of the proposed new Manitoba Act provides that the amount to 
be set aside for the reserve fund be based on the aging of loans. 

82 



7. The Committee also recommends that the amount of the allowance, 
based on the valuation of loans, should be shown as a separate amount 
rather than including the value of loans in the balance sheet at a net figure 
after allowance for bad and doubtful loans. The amount of the annual pro- 
vision should also be shown separately each year in the statement of profit 
and loss as an operating charge. The members of the credit union will then 
be able to form a reasonable assessment as to the efficiency of management 
and the soundness of its policies in making loans. 

8. The Committee also considered whether or not a contingency reserve 
was required after making provision for bad and doubtful debts to guard 
against other possible losses which a credit union might experience. Credit 
unions in the opinion of the Committee have an obligation to members 
to protect the deposits made by members and the amount which has been 
paid by members as payment for shares against any impairment in value. 
In view of the position of the members as depositors and shareholders 
and as a further measure of protection to them, the Committee recom- 
mends that there should be an additional general contingency reserve to 
ensure that all profits of the credit union are not paid out to members 
leaving no reserve against other losses. If an adequate provision is made 
for bad and doubtful debts the amount of the general contingency reserve 
need not be great. The Committee therefore recommends that, in addition 
to the allowance for bad and doubtful debts, each credit union be required 
in each year by way of a general contingency reserve to set aside an amount 
equal to a stated percentage of its yearly net profits until the general 
contingency reserve has reached an amount equal to a stated percentage of 
the assets of the credit union at risk, i.e., loans and investments. It would 
appear to the Committee that a percentage in the area of 5% of yearly 
net profits and 1% of assets at risk might be adequate. 

9. The Committee recommends that: 

(a) section 28 of the Act be repealed and replaced by a section which 
will require management of a credit union to make proper pro- 
vision for bad and doubtful accounts and, in any event to provide 
an allowance in respect of loans in default as to principal or interest 
in accordance with the formula set out in paragraph 6 of this 
Chapter; and 

(b) each credit union, in addition to the allowance for bad and 
doubtful debts, be required in each year to set aside, by way of 
general contingency reserve, an amount equal to a stated per- 
centage of its yearly net profits until such reserve equals a stated 
percentage of its assets as risk. 



1. S.C. 1952-53, c.28, section 51. 

2. British Columbia Act, section 34(5). 



83 



CHAPTER 24 

Financial Stability 
Liquidity 

1 . As has been noted earlier, a credit union receives money from members 
either by way of deposit or in payment for shares. Unlike the shares of 
the business corporation, the shares of a credit union are withdrawable 
at any time at the request of the member. They are, in effect, simply 
another form of deposit. While a credit union may, under its by-laws, 
impose a notice period before shares and deposits (other than those subject 
to withdrawal by negotiable orders) may be withdrawn, in practice, this 
right is not exercised and deposits and shares are withdrawable on demand. 
It is essential, therefore, that a credit union maintain sufficient assets in 
cash or "near" cash form to meet the demands which may be made upon it 
for withdrawals of both deposits and shares. "Liquidity", or the ability to 
provide cash when it is required, is an important element in the financial 
soundness of credit unions. Lack of liquidity could react against a credit 
union's soundness if the need to raise cash in a difficult period required 
the sale of investments or the discounting of loans involving losses larger 
than the reserve fund. 

2. Many local credit unions entrust either their league centrals or OCCS 
with their surplus cash either by way of deposit or, in the case of league 
centrals, through the purchase of shares. League centrals and OCCS in 
turn lend to other credit unions (and co-operatives, in the case of OCCS) 
which are in need of cash. League centrals and OCCS, in effect, act as 
bankers to a large part of the credit union movement through their ability 
to move cash from cash surplus credit unions to credit unions requiring 
cash. In view of the fact deposits with and shares of a league and ordinary 
deposits with OCCS are generally withdrawable on demand, the liquid 
strength of centrals and OCCS is an important factor in the overall stability 
of the credit union movement. 

3. Except for credit unions which permit the withdrawal of deposits by 
use of negotiable orders, there is no requirement in the Act that requires 
a credit union or any of the leagues to maintain any portion of assets in 
liquid form. In the case of credit unions which permit members to withdraw 
deposits by use of negotiable orders, section 27a provides that such a credit 
union shall not make any loan and shall not invest its funds otherwise than 
in government securities and municipal securities if the aggregate of: 

(a) its cash on hand or on deposit in chartered banks, the Province of 
Ontario Savings Office, trust companies, leagues under the Act, or 
co-operative credit societies subject to the Co-operative Credit 
Associations Act (Canada); and 

84 



(b) the face value of its investments in bonds and debentures of or 
guaranteed by the Government of Canada or any province thereof 
or by a municipal corporation in Canada, excluding any such 
investments that are pledged as security for money borrowed by 
the credit union 

is less than 20% of the amount of money deposited with the credit union 
that is withdrawable by negotiable order. This requirement is not, strictly 
speaking, a liquidity requirement. It does not require a credit union to 
maintain a certain percentage of assets of the prescribed class but merely 
prohibits the credit union from taking certain actions if the required 
percentage is not maintained. The Act also permits a contemplated liquidity 
to be met by deposits in a league despite the fact that leagues are not 
subject to any overall liquidity requirement. 

4. Although there is no mandatory liquidity requirement in the Act 
(except to the extent the provisions in respect of deposits subject to with- 
drawal by negotiable order can be said to be a liquidity requirement) the 
Director seeks, by persuasion, to require credit unions to maintain in cash 
or in assets quickly convertible into cash at least 10% of the amount of 
deposits and paid up shares. In the view of the Director, a higher percentage 
of liquidity is required in the case of those credit unions which have 
invested in mortgage loans to members. 

5. The Royal Commission on Banking and Finance in its chapter on 
credit unions and caisses populaires expressed concern at the low level of 
liquidity which it found existed in the credit union movement in various 
parts of the country. The credit union administrators of various provinces 
at meetings of such administrators have also devoted much time to the 
question of liquidity. This Committee is equally concerned that both 
credit unions and centrals maintain a sufficient degree of liquidity to meet 
the foreseeable requirements of members for the withdrawal of deposits 
and shares. 

6. The principal deposit taking institutions in Ontario are subject to 
mandatory liquidity requirements. Section 84 of The Loan and Trusts 
Corporations Act, 1 provides that every trust company shall at all times 
maintain: 

(a) cash on hand or on deposit in a chartered bank; 

(b) unencumbered debentures, bonds, stocks or other securities of or 
guaranteed by the Government of Canada or of or guaranteed by 
any province of Canada or of any municipal corporation in 
Ontario or city in Canada; 

(c) loans payable on demand and fully secured by a class of security 
referred to in clause b; and 

85 



(d) subject to the approval of the Registrar (of Loan and Trust Cor- 
porations) and to such conditions as the Registrar imposes, a 
credit from chartered banks in Canada 

to an aggregate of at least 20% of the amount of deposits and of funds 
received for guaranteed investment coming due in less than 100 days. 
Provision is also made in that Act for the percentage of each class of 
eligible assets that must be maintained. A substantially similar requirement 
is applicable to loan corporations (some of which accept deposits) under 
section 74 of the Act. Under the Bank Act, 2 each bank is required to 
maintain, as a primary reserve, a cash reserve in the form of notes of and 
deposits in Canadian currency with the Bank of Canada which shall be not 
less on the average during any month than an amount equal to 12% of 
deposit liabilities payable on demand in Canadian currency and 4% of 
deposit liabilities payable, after notice, in Canadian currency. Banks must 
also maintain a secondary reserve in addition to the cash reserve, if so 
required by the Bank of Canada. 

7. The majority of other provinces require credit unions to maintain a 
percentage of deposits and shares in "liquid" form although the per- 
centage and the type of assets which are considered to be liquid vary. In 
Alberta, credit unions must maintain 5% of shares, 25% of deposits 
subject to withdrawal by negotiable orders and 10% of other deposits in 
cash or readily convertible investments. 3 The requirements in New 
Brunswick are substantially the same as in Alberta. 4 Newfoundland 
requires credit unions to have at all times on deposit with a bank or a 
person acting or carrying on the business of banking approved for the 
purpose by the Registrar, at least 5% of its share capital and 25% of all its 
deposits. 5 Credit unions in Saskatchewan must maintain in cash or on 
deposit with a chartered bank or the Saskatchewan Co-operative Credit 
Society Limited 10% of shares and deposits and if such a credit union 
permits withdrawal of deposits by negotiable order it must also maintain, 
with respect to such deposits, cash on hand or in a chartered bank or in the 
Saskatchewan Co-operative Credit Society Limited or certain eligible 
investments 20% of deposits so subject to withdrawal up to $1,000,000 and 
15% of such deposits in excess of $1,000,000. 6 In Manitoba, a credit union 
must maintain a cash or liquid reserve of not less than 5% of the total of 
the shares, deposits and borrowings of the credit union which is to consist 
of cash on hand or in a chartered bank, shares and deposits in a central 
credit union, or bonds which are authorized investments for trust funds. 
A credit union that permits the withdrawal of deposits by negotiable orders 
must also maintain a cash or liquid reserve of 10% of such deposits up to 
$1,000,000 and 8% of such deposits in excess of $1,000,000. 7 Manitoba is 
currently contemplating a new act which, if enacted in its present draft 
form, would have the effect of increasing the cash or liquid reserve to 10% 
of shares, savings accounts, deposits, term deposits and borrowings, and 

86 



in the case of deposits subject to withdrawal by negotiable order an addi- 
tional cash or liquid reserve of 10% of such deposits up to $1,000,000 and 
8% of such deposits in excess of $1,000,000. British Columbia has recently 
changed its liquidity requirement which now requires a credit union to 
maintain in certain deposits and investments an amount not less than 10% 
of the aggregate of its net share capital, deposits and borrowings or such 
greater percentage, not exceeding 12%, as the Lieutenant-Governor in 
Council may order, with the power to the British Columbia Credit Union 
Reserve Board to reduce the percentage in the case of any particular credit 
union on application to not less than 8%. 8 

8. In the view of the Committee, it is essential that credit unions maintain 
sufficient assets in cash or near cash form to meet the expected demands for 
withdrawal of deposits and shares. There seems little doubt that a great 
many credit unions recognize the need for a certain degree of liquidity and 
do in fact retain a percentage of assets in cash or near cash form. There was 
no evidence presented to the Committee that credit unions, on the whole, 
have not been able to meet the reasonable demands of members for with- 
drawals due to a lack of liquidity. However, liquidity is of such basic im- 
portance that the Committee feels that a minimum liquidity requirement 
should be mandatory. The present situation in which the Act contains no 
general liquidity requirement and where the Director seeks to obtain 
liquidity in credit unions as a matter of persuasion is not satisfactory. 

9. The statistics furnished to the Committee by the Department of 
Financial and Commercial Affairs with respect to the operations of those 
credit unions reporting to the Department (and 262 out of 1,650 credit 
unions have not reported for the year 1968) show on a consolidated basis, 
at December 31 , 1968, cash of $27,960,000 and investments of approximately 
$72,000,000 and shares and deposits of approximately $590,000,000. On the 
assumption that the investments are of a type which would be eligible for 
liquidity purposes, the liquidity ratio on a consolidated basis of reporting 
credit unions was approximately 17%. The breakdown of the statistics into 
the various groups of credit unions indicates the following liquidity ratios 
on a consolidated basis within the groups, again assuming the eligibility 
of all investments for liquidity purposes: 

Industrial and Commercial Credit Unions 10.4% 

Public Service Credit Unions 12.5% 

Association Urban Credit Unions 22.4% 

Association Rural Credit Unions 25.3% 

Religious Urban Credit Unions 34.6% 

Religious Rural Credit Unions 29.6% 

Community Urban Credit Unions 17.4% 

Community Rural Credit Unions 14.1% 

87 



Industrial and commercial credit unions and public service credit unions 
account for approximately two-thirds of the total assets of all reporting 
credit unions. It must be assumed, within the various groups of credit 
unions, that there are those which are above the average and others below. 

10. It would appear that the minimum level of liquidity maintained by 
any group of credit unions is approximately 10% and this in the view of the 
Committee is the minimum level that should be required consistent with the 
desire to afford a reasonable measure of protection to members and at the 
same time not to divert an excessive percentage of the assets of the credit 
union for purposes other than the primary purpose of making loans to 
members at reasonable rates. 

1 1 . The Committee is also of the view that not only should shares and 
deposits be covered by liquidity requirements but that outside borrowings 
should also be included. The Manitoba Act has for some time extended the 
liquidity requirement in that province to cover borrowings. A recent 
amendment to the British Columbia Act now requires credit unions in that 
province to cover borrowings as part of the liquidity requirement. There 
appears to be very little difference between a borrowing by a credit union 
from its bankers or a central and a "borrowing" from a member by way 
of deposit or in payment for shares. Borrowings from chartered banks and 
OCCS are normally repayable on demand, just as "borrowings" from 
members by way of deposits or shares are withdrawable on demand. The 
total amount a credit union may borrow from outside the membership for 
all purposes, including liquidity, is limited to 50% of its paid up capital 
deposits and surplus, and as borrowings increase so the ability of a credit 
union to raise cash for liquidity by means of further borrowings decreases. 
Holding 10% of borrowings in liquidity is, therefore, a measure of pro- 
tection to credit unions. 

12. The leagues, in the operation of their centrals, and OCCS, by and 
large act as the "bankers" to many of the credit unions. As has been noted, 
centrals and OCCS act as the instrument which facilitates the transfer of 
cash from cash surplus credit unions to credit unions in need of cash. It 
seems apparent, in view of the function of centrals, that their liquidity is of 
great importance for the whole of the credit union movement. OCCS, being 
subject to the provisions of the Co-operative Credit Societies Act, is re- 
quired to maintain overall liquidity of 20% of deposits. 9 Leagues in 
Ontario, on the other hand, being subject to The Credit Unions Act, are 
subject to no mandatory overall liquidity requirement. While the managers 
of leagues are undoubtedly aware of the necessity for maintaining some 
degree of liquidity and undoubtedly do so, the Committee is of the view 
that the Act should also contain a mandatory liquidity requirement for 
leagues in the operation of their centrals. The Committee recommends that 
leagues be subject to the same liquidity requirements as the individual 

88 



credit unions. This represents a lower liquidity ratio than that imposed on 
OCCS, but the Committee is again conscious of the problem of finding a 
balance which will afford a reasonable measure of protection to those 
credit unions which use the facilities of a league central and at the same 
time not divert an excessive percentage of assets into areas outside the credit 
union movement. 

13. It has been represented to the Committee that credit unions should be 
allowed to rely on bank lines of credit to meet liquidity needs or alterna- 
tively that bank lines of credit should be considered as part of the "assets" 
of a credit union which constitute cash or near cash for liquidity purposes. 
Some support for this may be found in the provisions of The Loan and 
Trust Corporations Act which allows bank lines of credit to be taken into 
account, subject to such terms and conditions as the Registrar imposes. 
The Committee has been advised however that bank lines of credit will not 
be considered as meeting liquidity in the case of trust companies or loan 
companies which accept deposits. Bank lines are only permitted to satisfy 
liquidity requirements in the case of loan companies which do not accept 
deposits and which have an irrevocable line of credit, established by a 
written undertaking from a bank, for at least one year. The provision in The 
Loan and Trust Corporations Act was designed to cover the peculiar 
position of those loan companies which do not accept deposits but borrow 
in the long term capital markets. In the opinion of the Committee, bank 
lines of credit, as such, being subject to fluctuation at the instance of a bank, 
should not be regarded as the equivalent of cash to meet liquidity require- 
ments of the credit union movement. 

14. The question of liquidity cannot be divorced from management. 
Competent management of a credit union should recognize the need for 
liquidity and make a reasonable effort to forecast the cash needs of the 
credit union to meet anticipated withdrawals. Under certain circumstances, 
this could result in a credit union maintaining a higher percentage of liquid 
assets than the minimum percentages recommended by the Committee. 
What is recommended by the Committee appears to be a minimum accept- 
able percentage under most circumstances and should not be considered 
as a substitute for good management if a higher percentage of liquid assets 
may be needed or desirable in a credit union at any particular time to 
meet abnormal situations which may arise from time to time. 

15. The Committee recommends that: 

(a) each credit union and league central be required to maintain in 
cash or in the investments described below, 10% of the total of its 
deposits (including term or time deposits but excluding deposits 
subject to withdrawal by negotiable order), shares and borrowings; 

89 



(b) each credit union and league central be required to maintain in 
cash or in the investments described below, 20% of the total of its 
deposits subject to withdrawal by negotiable order; 

(c) since the aforesaid percentages are in the opinion of the Committee 
minimum acceptable percentages at the present time, the Act pro- 
vide for the increase in the aforesaid percentages by Regulation so 
that the liquidity percentage may be adjusted quickly, if this should 
prove necessary or desirable, in view of the probable emerging 
pattern of credit unions which may result if the recommendations 
of this Committee with respect to the membership bond are 
implemented ; 

(d) the liquidity requirement be represented by 

(i) cash on hand or on deposit with a bank, loan or trust com- 
pany, the Province of Ontario Savings Office, a league central 
or OCCS, 

(ii) investments in shares of a league, and bonds, debentures or 
other obligations of or guaranteed by the Government of 
Canada or of or guaranteed by any province thereof, excluding 
any such investments that are pledged as security for money 
borrowed by the credit union; 

(e) of the total liquidity requirement, at least 10% be represented by 
cash and deposits of the type referred to in clause (d) (i) above ; 

(f) investments for the purposes of determining the percentage of 
liquidity maintained be valued at market rather than at face amount 
as section 27a (2) (b) of the Act now provides ; and 

(g) a credit union and a league central be prohibited from making 
any loan or any investment (other than investments of the class 
referred to in clause (d) (ii)) at any time when its liquidity is less 
than the minimum percentages. 



1. The Loan and Trust Corporations Act, R.S.O. 1960, c.222, section 84; as re-enacted 
1966, c.81, section 7 and amended 1968, c.66, section 4. 

2. S.C. 1966-67, c.87, section 72. 

3. Alberta Standard By-laws, article XII, section 6. 

4. New Brunswick Standard By-laws, article XII, section 3. 

5. Newfoundland Co-operative Societies Rules, Rule 37. 

6. Saskatchewan Act, sections 65 and 87. 

7. Manitoba Act, section 57A. 

8. British Columbia Act, section 34. 

9. Co-operative Credit Associations Act, S.C. 1953, c.28, sections 44 and 45, as amended 
1968-69, c.31, section 6. 

90 



CHAPTER 25 

Financial Stability 
Stabilization Fund 

1 . In addition to the internal reserve or guarantee fund of the local credit 
union, a number of the other provinces require all credit unions to con- 
tribute to a common fund which is variously called a stabilization fund, a 
mutual aid fund or a provincial share and deposit guarantee fund. The 
purpose of such a fund is to provide an additional measure of protection 
to members of the credit union movement by requiring each credit union 
to contribute a certain amount which is then available throughout the 
whole of the movement in the province. If a credit union were to experience 
an abnormal loss on loans or because of other factors, such as misfeasance, 
its internal reserve fund probably would not be large enough to absorb the 
loss and members' share and deposit accounts would be impaired. A 
stabilization or mutual aid fund would then operate to protect the members 
against loss. Such a fund is in effect a form of insurance financed by and in 
most cases administered by the credit union movement. In some provinces, 
the fund can be used for purposes other than to meet losses which members 
may suffer. 

2. There is in Ontario no mandatory fund of this nature. OCUL, recogni- 
zing the value of a stabilization fund, established a voluntary fund in 1961. 
Each credit union that is a member of OCUL and chooses to participate in 
the fund initially invests an amount equal to 1/10 of 1% of its shares and 
deposits by way of a non-interest bearing loan repayable at the end of 1 5 
years. Each year thereafter, the participating credit union adds to the 
amount originally loaned an amount equal to 1/10 of 1% of any increase 
in shares and deposits over the previous year. OCUL in its brief has advised 
the Committee that all but 1 1 of its member credit unions participate in the 
fund, which is a clear recognition by a large part of the movement of the 
need for such a fund. The size of the fund at July 31, 1969 was approxi- 
mately $675,000. This fund has been used to render assistance to credit 
unions which have found it necessary to wind up operations and to make 
outright grants to those in financial difficulties. In the case of the winding up 
of a credit union, the fund has been used to purchase the assets, thus per- 
mitting an immediate payment to members of the amount of their shares 
and deposits, which might otherwise be delayed pending the collection of 
members' loans. The fund then takes over the collection of the loans. The 
Committee is advised that, since 1961 and to the end of 1968, some 80 
credit unions have been wound up under this plan, with the membership in 
each case receiving 100 cents on the dollar, and 8 outright grants have been 
made, presumably to credit unions in some kind of financial distress. 

91 



3. OCUL has made a valuable contribution to the stability of the credit 
union movement by the institution of its voluntary fund. However, there 
are several areas which limit the effectiveness of the fund. Firstly, not all 
credit unions in the province contribute to it. In addition to the small 
number of members of the league who have chosen not to participate, there 
some 116 credit unions who are not eligible to participate either because 
they are members of other leagues or not members of any league. Secondly, 
the size of the fund appears to the Committee not to be adequate. While the 
fund has been able to meet the demands on it since its inception, it is 
questionable how much assistance it could render if a major credit union 
were to experience financial difficulties. Although there is provision in the 
resolution of OCUL establishing the fund whereby contributions could be 
increased, OCUL, because of the voluntary nature of the fund, would, in 
our opinion, have difficulty in convincing members to increase their 
contributions to meet a serious financial crisis. A third disadvantage is the 
fact that not all credit unions in the province are covered and, if a credit 
union, not a participant in the fund, experienced financial difficulties, there 
would not only be hardship to its members, but to the movement as a whole. 

4. OCUL in its brief to this Committee has recommended that member- 
ship in a stabilization fund be made compulsory for all credit unions. A 
similar submission has been made by two local credit unions submitting 
briefs. The Committee is of the opinion that participation by all credit 
unions in a stabilization fund should be made mandatory. Such mandatory 
participation is required in most of the other provinces 1 . 

5. There appears to be no consistency in the legislation of those provinces 
where mandatory participation in a stabilization fund is required as to the 
uses to which the fund may be put. In certain provinces, the fund may be 
utilized on a broader basis than in others. In Saskatchewan, the fund, in 
addition to its primary use to protect members against loss, may also be 
used to provide financial assistance to credit unions in financial difficulties, 
presumably in the hope of rehabilitating such credit unions without loss to 
members. 2 In British Columbia, the fund would appear to be available 
only if a credit union fails, neglects or refuses to redeem a member's shares 
or to pay to the member his deposits. 3 The Committee feels that, while 
the primary purpose of the fund should be as a protection to members 
against loss, the fund can and should be used for the broader purposes of 
providing financial assistance, either in the form of loans or grants to 
credit unions in financial difficulties with a view to their rehabilitation, and 
of assisting and expediting in the orderly winding up of credit unions. The 
present voluntary fund of OCUL has been used in these ways with success 
and the right to use the mandatory stabilization fund in the same manner 
should be continued. 

92 



6. The Committee is concerned that the size of the present voluntary fund 
is not adequate in the event that a major credit union should find itself in 
financial difficulties or if more than one of the smaller credit unions ex- 
perienced difficulties at about the same time. It is difficult to determine 
a proper level for the size of the fund consistent with providing an adequate 
protection to all members of the movement and at the same time not build- 
ing the fund to an unrealistic level. Originally, in British Columbia, the 
Credit Union Reserve Board was authorized to assess upon all credit 
unions such sum as the Board determined not exceeding 1/5 of 1% of the 
total of each credit union's share capital and deposits until the amount of 
the fund equalled 1%, or such lesser percentage as the Board determined, 
of the total share capital and deposits of all credit unions. 4 In 1968 the Act 
was amended to provide, in effect, for an increase in contributions to a 
maximum of l A of 1% of each credit union's net share capital and deposits 
and for contributions to continue until the contributions of each credit 
union equal 2% of its net share capital and deposits. 5 The Committee 
understands that the fund in British Columbia now totals about $4,000,000. 
In Saskatchewan, credit unions are required to contribute to a mutual aid 
fund 5% of yearly net earnings until the fund reaches at least 1% of the 
total of the share capital and deposits of all credit unions. 6 Including the 
assessment made for the current year, the fund in Saskatchewan will have 
reached approximately $4,000,000, about 1% of the total of the share 
capital and deposits of all credit unions in the Province. It has been indi- 
cated to the Committee that the Mutual Aid Board in Saskatchewan may 
recommend the 1% ceiling be eliminated. In New Brunswick, contributions 
continue until the fund has reached 1% of the total of the share capital 
and deposits of all credit unions. 7 The Alberta Act appears to be silent on 
the maximum size of the fund but it is understood that the fund in this 
province is now about $1,000,000. The proposed Manitoba Act would base 
contributions on a percentage, not to exceed 34 of 1%, of loans outstanding 
until the fund reaches 1% of the total of all loans of all credit unions when 
provision is made for a revolving of contributions on a first in, first out 
basis. It would appear that in most of the provinces where there is now a 
mandatory fund the minimum size of the fund is not less than 1% of the 
total of the share capital and deposits of all credit unions in the province. 
The Committee feels that a mandatory fund in Ontario should not be of 
any less size. 

7. In British Columbia, Saskatchewan, Alberta, Manitoba and New 
Brunswick, the particular fund is administered by a separate board created 
under the relevant legislation. In Manitoba and New Brunswick there are 
two funds and two boards which recognize the separate existence of credit 
unions and caisses populaires in those provinces. In each province the 
composition of the board administering the fund is such that a majority of 
the members comprising the board are representatives of the credit union 

93 



movement and, except in New Brunswick, the provincial authority re- 
sponsible for credit unions is represented on the board. In some provinces, 8 
payments from the fund may only be made with the approval of the pro- 
vincial authority, thus giving government a veto on expenditures. OCUL, 
in its brief to the Committee, has suggested that a mandatory stabilization 
fund should not be government administered but that in effect there should 
be a fund in each league, administered by the league and presumably with 
each credit union in a particular league contributing to the fund ad- 
ministered by its league. Such a fragmentation of a stabilization fund into 
separate funds administered by each of the leagues might well serve to 
defeat the purpose of the fund. OCUL is by far the largest league in Ontario 
and the other leagues are quite small by comparison. A fund administered 
by the other leagues for the benefit of their members might very well be too 
small to meet the purposes for which it is established. One must also 
consider the position of the credit unions in the province that are not 
members of any league in view of the recommendation of the Committee 
that membership in a league not be made compulsory. To which fund would 
they contribute? The Committee is of the view that the requirements for 
the administration of a mandatory stabilization fund in Ontario can best 
be met by the creation of a separate Stabilization Board. Recognizing that 
the fund represents credit union moneys and that the credit union move- 
ment should play a large part in the administration of the fund, a majority 
of the members of such a Stabilization Board should be credit union 
representatives. 

8. As an alternative to a mandatory stabilization fund, the Committee 
considered the possibility of some form of share and deposit insurance. At 
the present time, credit unions are not eligible to participate in the deposit 
insurance provided by the Canada Deposit Insurance Corporation and, if 
there were to be a system of share and deposit insurance available to credit 
unions, it would have to be provincially operated until at least such time as 
credit unions were permitted to participate in the federal plan. A provin- 
cially operated plan of share and deposit insurance, which would in effect 
be open only to credit unions, would undoubtedly be an expensive proposi- 
tion, not only for government but for the movement. Moreover, such 
insurance could only operate after a loss had been incurred whereas a 
stabilization fund can be used for broader purposes. Deposit insurance, of 
necessity, would remove administration from the movement into Govern- 
ment and this we consider undesirable. The Committee feels that a manda- 
tory stabilization fund is a more acceptable solution to the problem. It may 
be, if credit unions are ultimately permitted to participate in the federal plan, 
that the movement will consider this the desirable course to follow. This is a 
matter for the future on which the Committee, at this time, would not want 
to express opinion. Under the present circumstances, the Committee 
views a mandatory stabilization fund as the preferable route to follow. In 

94 



this connection, the Committee agrees with the views expressed by the 
Royal Commission on Banking and Finance "we believe it desirable in the 
movement's own interest that the primary source of insurance come from 
within its own ranks". 9 

9. The Committee recommends that : 

(a) all credit unions in the province be required to contribute to a 
stabilization fund; 

(b) the stabilization fund be paid to and administered by a Stabilization 
Board to be created by the legislation and to be composed of seven 
members to be appointed by the Lieutenant Governor in Council, 
of which four should be representatives of the credit union move- 
ment, one shall be the Director and two should be representatives 
of the public generally not connected with the credit union 
movement; 

(c) the Stabilization Board should be given wide powers in the ad- 
ministration of the fund, including the power to borrow moneys 
and to appoint an administrator of credit unions that seek assis- 
tance from the fund ; 

(d) the Director should not have a veto over expenditures from the 
fund; 

(e) the fund should be available not only to meet losses of members of 
their share capital and deposits but also for the purposes of pro- 
viding financial assistance to a credit union which may be ex- 
periencing financial difficulties and assisting in the orderly liquida- 
tion of credit unions ; 

(f) each credit union be required to contribute annually to the fund 
1/10 of 1% of the total of its share capital and deposits until the 
contributions of such credit union reach 1% of the total of the 
sha/e capital and deposits of such credit union and thereafter 1% 
of any increase in its share capital and deposits : 

(g) if the capital of the stabilization fund is reduced as a result of its 
use for the purposes set out in clause (e), each credit union shall 
contribute, in addition to the contributions under clause (f), 1/10 
of 1% of its shares and deposits annually until the fund has been 
restored ; 

(h) the Stabilization Board be given power to assess an extraordinary 
levy for the purposes of the fund if this should be required; and 

95 



(i) pending its utilization, the stabilization fund be maintained in 
bank deposits, deposits with loan or trust companies, deposits with 
the Province of Ontario Savings Office, deposits with OCCS or 
the central of a league or invested in investments which constitute 
"eligible" investments for insurance companies under the pro- 
visions of The Corporations Act. 



1. Alberta, British Columbia, Manitoba, New Brunswick, Prince Edward Island, 
Saskatchewan. 

2. Saskatchewan Act, section 123. 

3. British Columbia Act, section 94. 

4. Ibid, section 97. 

5. An Act to amend the Credit Unions Act, S.B.C. 1968, c.13, section 17. 

6. Saskatchewan Act, section 118. 

7. New Brunswick Act, section 42J. 

8. Saskatchewan and New Brunswick. 

9. Report of The Royal Commission on Banking and Finance, page 170. 

96 



CHAPTER 26 

Financial Stability 
Supervision 

I. External supervision of credit unions is another important factor in 
ensuring the stability of credit unions and the protection of members' shares 
and deposits. All provincial legislation provides for some form of external 
supervision, in most cases by the provincial authority, and in some prov- 
inces provision is made for a mandatory yearly inspection. 1 In Ontario 
external supervision at the present time is a split function between the 
Department and the leagues. 

Section 50(3) of the Act provides: 

"(3) The supervisor or any person authorized by the Director may 
inspect and examine into the conditions and affairs of any credit union 
and shall be given access to all books, records and other documents 
and may make such inquiries as are necessary to ascertain its condition 
and ability to provide for the payment of its liabilities as they become 
due, and whether or not it has complied with this Act, and the officers 
and employees shall facilitate such inspection and examination." 

The section is permissive, rather than mandatory, and there is no obligation 
on the Department to make an examination on a regular basis or at all. 

Section 53(7) and 53(8) of the Act provide: 

"(7) Any competent person authorized by a league incorporated under 
this section may examine into the affairs of any credit union that is a 
member of the league and for such purpose he shall be given access 
to all books, records and other documents of the credit union and he 
may make whatever inquiries are necessary to ascertain its true con- 
dition and its ability to provide for the payment of its liabilities as they 
become due, and the officers and employees of the credit union shall 
facilitate him in his examination and inquiry. 

(8) Where, as a result of an examination under subsection 7, it appears 
that the assets of the credit union are shown in the statement mentioned 
in section 49 or in its records at an amount greater than their true value 
or that its records are inadequate to show its true financial position, 
or that it is being managed improperly, the league shall immediately 
report such information to the supervisor, and the league shall upon the 
request of the supervisor furnish him with such information as he 
requires regarding or resulting from the examination." 

2. Under the authority of sections 50(3) and 53(7) examinations are carried 
out by both the Department and the leagues. At present, most credit 

97 



unions are examined by Departmental examiners about once every two 
years. The Department endeavours to subject credit unions with a history 
of deficiencies or bad management to more frequent examination and some 
credit unions which are considered by the Department as financially sound 
and well managed may be examined at intervals of more than two years, 
particularly if they have appointed an auditor and are members of a league. 
The Department presently employs seventeen examiners who are primarily 
responsible for the external supervision of over 1,600 credit unions. Such a 
small staff cannot be expected to examine every credit union in Ontario 
in depth and on an annual basis and the Department relies heavily on the 
regular examinations carried out by examiners employed by the leagues, 
particularly OCUL. OCUL carries out regular examinations of its members 
and employs twenty-six full-time examiners. La Federation des Caisses 
Populaires (C.F.) de L'Ontario Ltee. has three full time examiners and La 
Caisse Regionale Nipissing et Sudbury Ltee., one; but the membership of 
such leagues is much smaller than the membership of OCUL. 

3. The practice seems to have grown up between the Department and 
OCUL for the Department to examine a member credit union in one year 
and OCUL in another so that most members of OCUL are examined every 
year. This arrangement depends for its effectiveness on a great deal of co- 
operation and liaison between the Department and OCUL. OCUL, as a 
matter of practice, sends a copy of all its examination reports to the 
Department and if any of the conditions referred to in Section 53(8) are 
discovered during the course of its examination, the report submitted to the 
Department is green stamped as a form of immediate alert. The other two 
leagues do not send a copy of all examinations to the Department but only 
those which are required to be brought to the attention of the Department 
under section 53(8). As a result, the Department is not aware of the 
examinations made by these leagues or the scope of them and accordingly 
attempts to examine the members of such leagues on a more frequent basis. 

4. The present system of external examination of credit unions appears 
to be unsatisfactory in several aspects. Firstly, the effectiveness of the present 
system whereby responsibility for the examination of credit unions is 
divided between the Department and the leagues is dependent upon close 
co-operation and co-ordination so as to avoid any unnecessary duplication 
or oversight in their respective examinations. However, the Committee has 
received submissions indicating that the degree of integration between the 
separate but interdependent examinations by the leagues and the Depart- 
ment to produce an efficient comprehensive examination system may not 
always exist. We are advised that some credit unions have not been exam- 
ined either by a league or by the Department for periods up to five years, 
while other credit unions have been examined both by league examiners 
and by the Department in a single year for no apparent reason other than 
lack of communication. Secondly, although the Act gives the Department 

98 



the right to examine a credit union at any time, it does not impose an 
obligation on the Department to examine. Some provincial Acts require 
the official responsible for supervising credit unions to examine each credit 
union "once in twelve months" 2 or "at least annually". 3 The Royal 
Commission on Banking and Finance in its chapter on credit unions and 
caisses populaires recommended that all credit unions should be subject to 
examination "at least once a year and more often if necessary". 4 The regu- 
lar annual examination is perhaps the most important single means of 
ensuring individual credit unions are operating in accordance with the Act 
and are on a sound financial basis and is therefore important in assuring the 
stability of the credit union movement as a whole. The Committee therefore 
considers inadequate the present provisions of the Act relating to the 
examination of credit unions and the current practice whereby most credit 
unions are subject to examination by the Department biennially, some 
annually and a number only at infrequent and irregular intervals. 

5. The Committee recognizes that with over 1,600 active credit unions in 
Ontario, a requirement to examine every credit union on an annual basis 
would place a considerable administrative burden upon those responsible 
for the supervision of credit unions. The credit union movement in those 
provinces where the relevant legislation requires annual examinations is 
far smaller than that in Ontario and a fewer number of annual examinations 
is required. Nevertheless, we consider the annual examination of all 
credit unions to be essential and are therefore principally concerned as to 
how such examination may best be carried out. 

6. Apart from evidence of the lack of co-ordination between the leagues 
and the Department in the examination of credit unions, the Committee 
considers that the present de facto partial delegation of responsibility for 
the regular examination of credit unions to the leagues to be unsatisfactory 
in principle. The present system as OCUL suggested in its brief results in 
considerable and unnecessary overlapping and duplication of work and 
confusion to credit unions from different viewpoints being superimposed 
on them by two groups of examiners. The examination is not an audit and, 
among other things, examiners advise credit unions on the suitability of 
their systems. As OCUL has pointed out "each body of examiners over the 
years has developed its own approach to a multitude of problems and 
advise credit unions accordingly. The existence of two such bodies has 
hindered any standardized approach to particular problems throughout 
the movement and has confused the membership." It appeared to the 
Committee that the only satisfactory means of creating an efficient com- 
prehensive system for the regular examination of credit unions is to vest 
in one body sole responsibility for the conduct of such examinations. In no 
other province, save perhaps Quebec, where the legal position is not clear, 
is the responsibility for the regular examination of credit unions shared 
between two separate and independent bodies. 

99 



7. The Committee considered whether the Department should be made 
wholly responsible for the annual examination of credit unions, leaving the 
leagues with their present power under section 53(7) of the Act to examine 
the affairs of their member credit unions but not as part of the regular 
examination process. However, there appear to be two objections to such 
a proposal. Firstly, the Department already bears the entire financial cost 
of maintaining seventeen examiners since, in contrast with certain other 
provinces, no charge is levied upon credit unions for the examination by 
the Department. To require annual examinations of all credit unions by 
the Department would necessitate a considerable increase in the number of 
examiners employed by the Department and consequently a significant rise 
in the costs of the Department in administering the Act. At least two 
provincial Acts impose a scale of charges for annual examinations of credit 
unions 5 and we are advised that the provincial authorities in those provinces 
are thereby able to recover much of the cost of maintaining an examination 
service. The Committee considers that the credit union movement should 
be financially responsible for the cost of maintaining an adequate examina- 
tion service. Nevertheless, we do not recommend that the Department 
be vested with sole responsibility for the annual inspection of credit unions 
and recoup the additional expense by charging a fee for examinations since 
to do so would eliminate the existing limited degree of self-regulation which 
presently exists through the participation of the leagues in the examination 
process. 

8. The Committee is of the view that self-regulation in the credit union 
movement with regard to the responsibility for conducting the annual 
examination should be encouraged. OCUL has on various occasions pro- 
posed that the present system be rationalized by the exclusive delegation 
to the leagues of the responsibility for periodic examination of credit unions 
and a recommendation to that effect is contained in their brief to this 
Committee. What is envisaged by the proposal is that the regular periodic 
examination of credit unions would be conducted solely by the leagues 
while government inspectors would be concerned only with special investi- 
gations of particular credit unions usually prompted by the green stamped 
reports of the leagues submitted to the Department. To entrust to the 
leagues the sole responsibility for conducting annual examinations of credit 
unions would no doubt produce the self-regulation which we agree is 
desirable in principle. There is, however, one major objection to vesting 
this function in the leagues. It has been noted in Chapter 2 that some 34 
credit unions in Ontario representing total assets of about $48,000,000 have 
elected not to join any league and this Committee recommended against 
making membership in a league compulsory. This raises the question how 
would such credit unions be examined on a regular basis without again 
splitting the function ? The Committee considered as a possible alternative 
to compulsory membership in a league a requirement that those credit 

100 



unions not members of a league should designate which league would 
examine their affairs. However, the Committee concluded that since this 
would of necessity involve a requirement that unaffiliated credit unions 
contribute through inspection fees (which in the case of members are paid 
out of membership dues) to a league which they have chosen not to join, 
it would be in conflict with out main recommendation that credit unions 
be free to join or not to join a league as they see fit. The Committee 
recommends that the responsibility for conducting annual examinations 
not be vested in the leagues. 

9. The Committee recommended in Chapter 25 the establishment of a 
compulsory stabilization fund to be administered by a Stabilization Board 
consisting of four representatives of the credit union movement, two per- 
sons unconnected with the credit union movement and the Director. It 
would appear to the Committee for several reasons that the Stabilization 
Board is the appropriate body in which to vest responsibility for the annual 
examination of credit unions. Firstly, it would provide a means whereby 
annual examination could be made the primary responsibility of the credit 
union movement rather than the Department, which in principle is what we 
recommend, without impinging upon the freedom of those credit unions 
which choose not to join a league. Secondly, while enabling the credit 
union movement to be self-regulating so far as the conduct of annual 
examinations is concerned, since we recommended that a majority of the 
Stabilization Board should consist of representatives of the credit union 
movement, it would at the same time not entirely exclude the participation 
in a minority role of the government through the membership of the 
Director. Even if the immediate responsibility for examining credit 
unions is removed from the Department, the ultimate responsibility for 
the financial stability of the credit union movement inevitably rests with 
the provincial authority. Thirdly, and perhaps most important, the 
Committee considers that the responsibility of examining credit unions 
annually is a natural adjunct of the basic function of the Stabilization 
Board which is to preserve the financial stability of credit unions by 
ensuring that no credit union member suffers a loss as a result of the 
insolvency or illiquidity of any credit union. Since the practical use of the 
stabilization fund is to make good losses incurred by credit unions it 
would seem to the Committee that the Stabilization Board, not unlike an 
insurer, has a primary and pecuniary interest in regularly surveilling the 
financial position of individual credit unions which is essentially the 
purpose of the annual examination. This would draw to the attention of the 
Stabilization Board at the earliest possible moment any financial weakness 
or unsound policies of a credit union which if left unchecked might result 
in claims being made against the stabilization fund. 

10. The Committee considers that if the credit union movement is, in 
effect, to be self-regulating so far as the annual examination of credit unions 

101 



is concerned it should also be self-supporting. The Committee recommends 
that the cost of maintaining a sufficient staff of examiners to examine every 
credit union in Ontario on an annual basis should be met, as far as possible, 
from the income of the stabilization fund. However, we recognize that it 
will be some years before the stabilization fund will have reached an 
amount which would produce sufficient income to cover the costs of ad- 
ministrating an annual examination system. Until the fund has attained 
sufficient size, the Committee recommends that credit unions be charged an 
annual examination fee assessed according to their assets to the extent that 
the income of the fund is insufficient. In the first years of the stabilization 
fund when its income will be at its lowest, the Committee also recommends 
that consideration be given to the provision of a grant to the Stabilization 
Board by the government by way of contribution to the cost of examination. 

1 1 . The Stabilization Board should furnish a copy of each examination to 
the Department and the Department should retain a staff of examiners to 
investigate those credit unions which are not being operated satisfactorily. 
The Committee does not consider that there should be any change in 
or lessening of the powers of the Director under section 51. 

12. The Committee recommends that : 

(a) the Stabilization Board be required to carry out an annual examina- 
tion of all credit unions ; 

(b) the cost of such annual inspection be defrayed, to the fullest extent 
possible, from the income of the stabilization fund, with any 
deficiency to be met by an assessment against all credit unions, 
based on size of assets ; 

(c) in the early years of the Stabilization Board and until the stabiliza- 
tion fund is built to its desired size, the province consider a subsidy 
toward the cost of the annual examination ; 

(d) a copy of each examination made by the Stabilization Board be 
furnished to the Department; and 

(e) there be no change in the powers of the Director under section 51 . 



1. Alberta Act, section 67. 
British Columbia Act, section 42. 
Manitoba Act, section 80. 

Prince Edward Island Act, section 28. 
Saskatchewan Act, section 99. 

2. Manitoba Act, section 80. 

3. Prince Edward Island Act, section 28. 
Saskatchewan Act, section 99. 

4. Report of The Royal Commission on Banking and Finance, page 169. 

5. B.C. Reg. 7/65 as amended by Regulation 20/65. 
Saskatchewan Regulation 282/68. 

102 



CHAPTER 27 

Financial Stability 
Auditors 

1. In the traditional tripartite division of the administration of the affairs 
of a credit union the responsibility for examining and auditing the books of 
a credit union is vested in the supervisory committee. 

2. A voluntary supervisory committee may be capable of maintaining 
adequate supervision over the financial affairs of a small credit union, but 
as the membership and assets of a credit union grow the duties of the 
supervisory committee become increasingly complex and onerous with the 
result that it may be difficult to find, among the members of larger credit 
unions, persons who are able and willing to serve on a voluntary basis on 
the supervisory committee. Even if such members are available it may not 
always be desirable for a supervisory committee whose members lack pro- 
fessional training to undertake alone the responsibilities of auditing the 
books and examining the financial affairs of a credit union since they 
cannot be expected to act with the same degree of competence and 
thoroughness as an experienced, qualified outside auditor. The leagues, as 
part of an educational service, provide handbooks and advice and valuable 
assistance to the voluntary supervisory committee, but this cannot, of itself, 
ensure any degree of expertise. 

3. The desirability, and perhaps in some cases the necessity, of a credit 
union obtaining the assistance of a professional outside auditor is reflected 
in several provisions of the Act. A credit union may by by-law appoint an 
auditor in addition to or in lieu of the supervisory committee and may 
delegate to such auditor the whole or such part of the duties of the super- 
visory committee as the by-law provides. 1 The supervisory committee has 
power to appoint an auditor with the prior written approval of the super- 
visor if the majority of the supervisory committee suspects that any of the 
funds, securities or other property of the credit union have been "mis- 
appropriated or misdirected". 2 The supervisory committee may also have 
a general power to appoint an auditor pursuant to section 32(14) of the 
Act as a "person" to assist it in performing its duties although, since the 
remuneration of such a person is subject to determination by the board of 
directors, as a practical matter this power may be severely limited. Since 
there is some question as to the scope and meaning of the particular pro- 
vision, the Committee elsewhere recommended amendments to the 
relevant provision of the Act to vest in the supervisory committee a general 
independent power to appoint an auditor to assist it and to authorize his 
remuneration. 

103 



4. In certain circumstances a credit union may have an auditor imposed 
upon it. Under section 51 of the Act the Director may appoint an auditor 
to examine the affairs of a credit union "where it appears to the Director 
from an examination of the condition and affairs of a credit union that any 
of the funds, securities or other property of the credit union may have been 
misappropriated or misdirected or that the records do not show the true 
financial position of the credit union". This power arises only after it has 
come to the notice of the Director that a credit union may be in difficulties 
and, as in the case of the power of the supervisory committee to appoint an 
auditor with the written consent of the supervisor, losses may have already 
occurred and it may be too late for the auditor to do more than perform a 
post mortem. 

5. The Act requires a credit union to appoint an auditor only when it 
wishes to permit its members to withdraw deposits by means of negotiable 
orders (i.e. chequing facilities). Section 27a of the Act, which came into 
force in 1964, permits under conditions prescribed therein, credit unions 
with a combined share capital and deposits of more than $100,000 to 
permit members to withdraw deposits by means of negotiable order. One 
of the conditions requires such credit unions to appoint an auditor either 
in addition to, or in lieu of, the supervisory committee. A likely reason for 
the requirement that such credit unions appoint an external auditor is that 
for the first time the general public are expected to place their trust in a 
credit union by accepting cheques drawn on it. Chequing facilities in credit 
unions are a fairly recent innovation in Ontario and we are advised that at 
present only about 83 credit unions and 53 caisses populaires offer this 
service, although many more are of sufficient size to qualify. If the experi- 
ence of other provinces is a valid guide, chequing will probably become a 
standard service offered by most credit unions which qualify under section 
27a of the Act. For commercial reasons, a credit union may have to introduce 
a chequing service and will thereby be compelled to appoint an auditor, 
but until it does so it is not compelled to appoint an auditor and if it chooses 
not to provide a chequing service it may never have to appoint an auditor 
under the present requirements of the Act. 

6. It is perhaps anomalous that all commercial corporations of whatever 
size are required by The Corporations Act to appoint auditors, while a 
credit union, an institution dealing almost exclusively in money, is required 
to appoint an auditor only in the limited event that it chooses and is 
eligible to permit its members to withdraw deposits by negotiable orders. 
Although The Corporations Act does not state that an auditor need have 
any special qualifications, the Committee, in its earlier Interim Report, 3 
noted that no amendment to that Act was required since the provision of 
the Public Accountancy Act would effectively preclude anyone from per- 
forming the statutory duties of an auditor without being licensed under 
that Act. 

104 



7. There is an increasing trend in other provinces towards making the 
appointment of a qualified external auditor mandatory by credit unions 
which have attained a certain size in assets. There is some variation in the 
size a credit union may reach before it is required to appoint an auditor. In 
Nova Scotia and Prince Edward Island, credit unions with total assets 
and, in the case of Saskatchewan, with combined shares and deposits, 
exceeding $200,000 must appoint a qualified auditor. 4 In Alberta, a credit 
union with combined shares and deposits of more than $250,000 is required 
to appoint an external auditor. 5 A recent Rule promulgated pursuant 
to the provisions of the British Columbia Act requires credit unions 
in British Columbia with combined shares and deposits of more than 
$300,000 to appoint an auditor. 6 Those caisses populaires which do not 
belong to a recognized federation are required by the Quebec Act to 
appoint an auditor. 7 

8. The Committee is of the view that it is desirable in principle that all 
credit unions appoint an independent external auditor. This principle, 
must be tempered to a certain extent by a practical consideration of the 
cost involved. Credit unions under the Act are effectively limited in the 
total income they can generate by the interest ceiling on loans. There are 
many credit unions with closely knit memberships and an established 
record of good management which have assets of less than $100,000 and 
where financial hardship could result through a mandatory provision 
requiring the appointment of an auditor, particularly if account is taken of 
our earlier recommendation that all credit unions be required to contribute 
to a stabilization fund, which imposes an additional charge upon the 
income of credit unions, the recommendation that the amount of the 
annual appropriation to the guarantee fund be determined by reference to 
the outstanding delinquent loans of a credit union, which depending upon 
the management of the credit union, may result in a higher annual charge 
against income, and the recommendation of a minimum liquidity require- 
ment which may have the effect of reducing the earning power of a credit 
union if it entails a reduction in the assets available for loans to members. 
These recommendations, together with our recommendation that all credit 
unions be examined at least once a year, are designed to promote and 
safeguard the stability of credit unions and, therefore, to protect the savings 
of members and while they do not, in the view of the Committee, affect the 
desirability in principle of a requirement that all credit unions appoint 
external auditors, they do justify the gradual implementation of such a 
requirement in the case of smaller credit unions. These overall recommen- 
dations also justify provision for the exemption of small credit unions from 
the requirement, if they can establish to the satisfaction of the Stabilization 
Board that they are sufficiently well managed so as not to require the 
appointment of an auditor in order to protect the savings of members and 
that because of their size and the inherent limitation upon their earning 

105 



capacity resulting from the interest ceiling, the expense of appointing an 
auditor would constitute a disproportionate charge on their income. A 
gradual implementation of the obligation to appoint an auditor will, it is 
hoped, enable smaller credit unions to adjust their operations to meet the 
increased expense of appointing an auditor. 

9. Where a credit union, pursuant to our recommendations, is required 
to appoint an auditor such appointment should be made by the credit union 
at the annual meeting and the auditor so appointed should hold office until 
the next annual meeting or until his successor is appointed by the credit 
union in general meeting. The Committee also recommends that a credit 
union in general meeting be empowered by ordinary resolution to remove 
the auditor before the expiration of his term of office subject to such pro- 
cedural requirements as may be needed to ensure adequate notice to the 
auditor so as to afford him an opportunity to make representations to the 
membership with respect to the proposed resolution for his removal and 
replacement. The Committee considers that the enactment of a section 
similar to section 155 of the proposed Business Corporations Act 8 which 
incorporates the recommendations of this Committee in its first Interim 
Report, 9 would provide a suitable framework for the appointment, tenure 
and conditions for the removal of an auditor of a credit union. 

10. In order that the requirement for the appointment of an independent 
qualified auditor should constitute an effective check upon the financial 
affairs of a credit union and complement the annual examination of every 
credit union which the Committee earlier recommended be carried out by 
examiners appointed by and responsible to the Stabilization Board, the 
Committee considers it essential that the Act set out in detail the rights and 
duties of the auditor. Provisions substantially similar to those contained in 
subsections (1), (2), (5), (6), (8), (9) and (10) of section 158 of the proposed 
Business Corporations Act would appear to apply to the auditor of a credit 
union and, with necessary changes, should be embodied in the Act. 

1 1 . The Committee recommends that : 

(a) all credit unions with combined shares and deposits exceeding 
$300,000 be required to appoint an auditor forthwith ; 

(b) that one year after such requirement is imposed for credit unions 
with combined shares and deposits exceeding $300,000, credit 
unions with combined shares and deposits exceeding $200,000 be 
required to appoint an auditor; 

(c) that one year after such requirement is imposed for credit unions 
with combined shares and deposits exceeding $200,000, all re- 
maining credit unions, subject as hereinafter provided, be required 
to appoint an auditor; 

106 



(d) a credit union with combined shares and deposits of less than 
$100,000 should have the right to apply to the Stabilization Board 
for permission to continue operating without appointing an auditor, 
which permission the Stabilization Board should be empowered to 
give, on a revocable basis, if it is established that the affairs of such 
credit union are sufficiently well managed so as not to require the 
appointment of an auditor in order to safeguard the savings of the 
members ; 

(e) the auditor be appointed by the members at the annual meeting; 

(f) the members in general meeting be empowered by ordinary 
resolution to remove the auditor before the expiration of his term 
of office ; 

(g) a section similar to section 155 of the proposed Business Cor- 
porations Act be included in the Act to govern the appointment, 
tenure and conditions for the removal of the auditor of a credit 
union; and 

(h) provisions substantially similar to those contained in subsections 
(1), (2), (5), (6), (8), (9) and (10) of section 158 of the proposed 
Business Corporations Act should be included in the Act to set out 
the rights and duties of the auditor of a credit union. 

The foregoing recommendations are in addition to the present requirement 
that credit unions which permit their members to withdraw deposits by 
negotiable order appoint auditors. In the opinion of the Committee there 
should be no change in this requirement. Nor should these recommenda- 
tions be construed as limiting or affecting the separate powers under the 
Act of the supervisory committee to appoint an auditor or the power of 
the Director to require the appointment of an auditor in the particular 
instances now provided in the Act. 



1. Section 32(11). 

2. Section 32(13). 

3. Chapter X, Section 2. 

4. Nova Scotia Act, section 40(2). 
Saskatchewan Standard By-laws, article 62. 
Prince Edward Island Act, section 19(5) (a). 

5. Alberta Standard By-laws, article XIV. 

6. B.C. Reg. 2/69. 

7. Quebec Act, section 43 (e). 

8. Bill 125, The Business Corporations Act, 1st Session, 28th Legislature, Ontario, 
17 Elizabeth II, 1968. 

9. Chapter X, Section 3. 

107 



CHAPTER 28 

Miscellaneous Amendments 

The Committee considered a number of miscellaneous, specific, isolated 
provisions in the Act which do not conveniently fit into the context of any 
of the previous chapters. Some are relatively minor and most were brought 
to the attention of the Committee in the submissions of OCUL. 

1. Transfers to "chequing accounts" 

The "chequing" service which certain credit unions are permitted to 
offer their members involves a deposit by the credit union in a current 
account with a chartered bank or OCCS. OCCS has special clearing 
facilities arranged with clearing houses. Cheques drawn by a member on 
his chequing account with the credit union are met from the current 
account of that credit union with the chartered bank or OCCS and the 
credit union in turn debits the member's chequing account by the amount 
of any negotiable order presented. In addition to a general prohibition 
against overdrafts, 1 presumably on the basis that an overdraft is in essence 
a loan and should therefore be subject to the precedures for the approval 
of loans contained in the Act and in the by-laws of a particular credit 
union, the Act specifically prohibits the use of general authorizations for 
the transfer of funds from a member's share or ordinary deposit account to 
his "chequing account". Under section 27b(2) such transfers require the 
express authorization of the member in writing given in each case. It was 
submitted to this Committee that to require written express authorization 
is an unreasonable condition since clearing house rules require that 
cheques which cannot be honoured by a credit union because of insufficient 
funds in the member's chequing account must be returned on the day of 
presentation and this does not always give the credit union sufficient 
opportunity to contact the member concerned and to obtain his express 
written authority for the transfer of funds to meet the cheque presented. 
Nor can a temporary overdraft be granted because of the prohibition 
against overdrafts in section 27b(l) referred to above. As a result a credit 
union may be compelled by law to return a cheque in circumstances where, 
were it not for the prohibition on a general authorization, the cheque could 
be honoured. The Committee is of the view that the prohibition against the 
use of general authorizations is an unnecessary inconvenience to both the 
credit union and its members and recommends that section 27b(2), which 
is exceptional among provincial Acts, be repealed. 

2. Bonding of Credit Union Officers and Employees 

The Act requires credit union officers or employees who receive or who 
have charge of moneys to be bonded in such manner and in such amount 

108 



as the board of directors determines before they may assume their duties. 2 
The arrangements for the bonding of credit union employees are generally 
made by the leagues but it would appear that the powers of a league may 
not extend to arranging for the bonding of credit union officers. 3 OCUL 
in its submission to the Committee has suggested that the Act contain a 
provision stipulating the minimum coverage of the bond. In order to re- 
tain sufficient flexibility to meet changing conditions, the Committee con- 
siders that the requirements with respect to the bonding of credit union 
officers and employees be prescribed in Regulations to the Act and recom- 
mends that such Regulations should initially require every credit union to 
bond its officers and employees who receive and have charge of moneys in 
an amount at least equal to the total assets of the credit union subject to a 
maximum coverage of $1,000,000. The Committee is advised that this is the 
standard coverage currently available under the CUMIS 578 and CUNA 
576 Bonds. The Committee also recommends that section 53(1 )(c) be 
amended so as to remove any doubts as to the power of a league to arrange 
for group bonding of credit union officers as well as employees. 

3. Trust Accounts 

Unlike the legislation in several provinces, the Act contains no provision 
to protect a credit union from disputes involving the withdrawal of moneys 
subject to trusts. The Committee considers that a credit union should not 
have to concern itself with the terms of any trusts governing the beneficial 
ownership of shares or deposits and recommends the enactment of a 
provision similar to section 94(1) of The Loan and Trust Corporations Act 
which would limit the responsibilities of the credit union to dealing with 
and acting upon instructions of the registered holder of shares or deposits 
in the credit union. 

4. Investments and Deposits in a League 

The Act contains provisions respecting investments by a credit union in a 
league by way of deposits, loans or the purchase of shares. By way of inci- 
dental and ancillary powers a credit union may deposit money with and 
make loans to a league up to a maximum of 25% of its share capital and 
deposits. 4 A credit union is also empowered to invest in shares of a league 
amounts up to a maximum of 25% of its share capital. 5 Since there appears 
to be no immediate reason for the limitation on the purchase of shares in a 
credit union to 25% of its share capital rather than 25% of its share capital 
and deposits, as in the case of deposits in or loans to a league, the Commit- 
tee recommends that a credit union be empowered to invest an amount not 
exceeding 25% of its share capital and deposits in the shares of a league. 
The effect of this recommendation would be to increase all forms of invest- 
ment in a league to an amount not exceeding 50% of the shares and deposits 
of a credit union, but would still limit such maximum investment to 25% 

109 



in shares and 25% in deposits with or loans to a league. The Committee 
considers that a credit union should be permitted to select such form of 
investment in a league as it deems most advantageous and, therefore, 
recommends that the provisions of section 4(1 )(b) and section 35(l)(c) be 
combined so as to permit a credit union to invest an amount not exceeding 
in the aggregate 50% of the shares and deposits of a credit union in a 
league whether by way of deposits, purchase of shares or loans. 

5. Organization expenses 

Section 28(3) requires that entrance fees and fines be added to the guaran- 
tee fund but permits the board of directors to withdraw up to $70 towards 
organization expenses incurred during the first year of operation. The 
amount which may be withdrawn has not been changed since the enact- 
ment of the provision in 1954. In accordance with a submission of the 
OCUL, the Committee recommends that the amount the board of directors 
should be permitted in their discretion to withdraw from the guarantee 
fund to be applied towards organization expenses incurred during the first 
year of operation be increased to $150. 

6. Items required to be included in the balance sheet 

Section 43(3) sets out the information which must be included in a 
balance sheet of a credit union. It appears to the Committee that there is 
additional information which should be included in the balance sheet 
which is not now required. The Committee recommends that section 43(3) 
be amended to require the balance sheet which must be placed before the 
members at the annual meeting to include, by way of additional require- 
ments, a statement of the guarantee fund and other reserves, a statement of 
surplus, and a breakdown of investments. 



1. Section 27b(l). 

2. Section 34. 

3. Section 53(1) (c). 

4. Section 4(2)(b). 

5. Section 35(1) (c). 

110 



Appendix A 



Partial list of persons and organizations who submitted 
written briefs, communications or suggestions. 



R. F. Bott. 

Caledonia Community Credit Union Limited. 

Canadian Westinghouse Employees' (Hamilton Works) Credit Union 
Limited. 

College Heights (Guelph) Credit Union Limited. 

Courtaulds Employees' (Cornwall) Credit Union Limited. 

CUNA (Hamilton) Credit Union Limited. 

Fort Erie E.S.C. Credit Union Limited. 

Holy Name Parish (Kirkland Lake) Credit Union Limited. 

L.C.B.O. Employees' (Toronto) Credit Union Limited. 

Massey-Ferguson Employees' (Brantford) Credit Union Limited. 

R. J. McMaster, Q.C., Vancouver. 

Niagara Township Credit Union Limited. 

Ontario Credit Union League Limited. 

Ontario Department of Financial and Commercial Affairs. 

Page-Hersey Employees' (Welland) Credit Union Limited. 

Plymouth Cordage Credit Union Limited. 

St. Andrews Parish (New Sudbury) Credit Union Limited. 

St. Louis Parish (Waterloo) Credit Union Limited. 

St. Michaels Parish (Leamington) Credit Union Limited. 

B. B. Shekter, Q.C., Hamilton. 



Ill 



r_i_4-iyb4 




DATE DUE 


APR 


3 n 2010 








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